1Q 2012

U.S. Private Client Asset & Wealth Management

Founders Quarterly

management advisory and insights for financial services institutions Founders Advisory

Overview of 1Q 2012 Issue of Founders Quarterly: U.S. Private Client Asset & Wealth Management

The Postmodern Era

Founders Advisory Ideas & Insights 2 Founders Quarterly 1Q 2012 U.S. Private Client Asset & Wealth Mgmt.

The postmodern era (post-crisis) is shaping up to be the most exciting yet for the global asset and wealth management marketplace. There is a lot at stake. After all, this is a client-centric industry where the primary function is to advise institutions and individuals on how best to save, invest, and allocate their capital to meet long- to short-term liabilities. And the demand for this advice is only growing as these liabilities remain woefully underfunded. Additionally, the industry is truly global with an abundance of opportunity. While the global nature of the industry is adding to the difficulty in navigating the postmodern era, the asset pools developing worldwide are unavoidable. These, and many other items, are all working to shape the postmodern era, which is largely why this period will be particularly exciting. What is the way forward? This is not an easy undertaking as there remains a mountain of ambiguity to traverse and new global trends to understand. In this issue of Founders Quarterly we focus on the U.S. private client asset and wealth management marketplace and take the first steps to better understand how the postmodern era is impacting this industry segment. We worked closely with both asset managers and private wealth managers to better understand the key agenda items shaping the future of the U.S. private client segment. As part of our annual survey of senior executives within each cohort (i.e., separate survey for asset managers and private wealth managers), we delved into several items impacting the business over the next five years. Specifically, we examined challenges to profitability, growth, and where firms plan to make new investments over the next five years.

While at first glance these challenges appear daunting and perhaps paint a gloomy future for the industry, we remain extremely positive on the future of the industry particularly for those firms that take steps today to be better positioned for the postmodern era. These challenges are not trivial and potentially the greatest the industry has ever experienced (and why this era will be particularly fun). We believe that winning firms will follow through and fund the new investments they rate as significant over the next five years. To that end, they will take meaningful strides in overcoming the array of challenges to future growth and profitability. In this issue of Founders Quarterly we also examine private wealth management advice delivery via managed accounts. The prospects for growth remain very strong over the next five years and unified managed accounts (UMAs) will be a large driver of this growth. Lastly, we delve into how asset managers are restructuring their approach to addressing U.S. private wealth managers.

Issue Overview

The remainder of this document provides highlights from the 1Q 2012 issue of Founders Quarterly. We provide the full table of contents, our methodology for original ideas and insights including the more than 20 proprietary exhibits found in this issue, and two sample pages pulled directly from the 1Q 2012 issue.

Contents

This Founders Advisory material is intended exclusively for distribution within the purchasing firm. Distribution to or use by any other firm, subsidiary, affiliate, external field force, or client is prohibited (as is reproduction in whole or part in any media, including electronic or company communications), except by permission. Analysis relies on data sources deemed to be reliable. Although believed to be accurate, this information is not guaranteed and may be incomplete. Founders Advisory. All rights reserved.

Founders Quarterly is our vehicle for delivering Ideas and Insights on a regular basis. We explore and provide advice for relevant global asset and wealth management issues and problems supported by our deep industry knowledge, applicable senior-level industry experience, and in-depth knowledge development and problem-solving process. Each quarterly issue draws upon our ongoing dialogues with senior executives from around the world and our multiple ongoing invite-only proprietary surveys. We distribute an issue each calendar quarter in electronic format.

I. Summary: The Postmodern Era

a. Asset Managers

II. Key Agenda Items Shaping the Future of the Industry

i. Profitability Challenges

ii. Growth Challenges

iii. New Investments

b. Private Wealth Managers i. Profitability Challenges

ii. Growth Challenges

iii. New Investments

c. Collaboration i. Open Architecture

ii. Revenue Sharing

III. Private Wealth Management Advice Delivery

a. Managed Accounts Growth

b. You Say RPM, We Say UMA

i. The Role of the Strategist

ii. Are Financial Advisors Equipped?

IV. Asset Managers Deploy a Multi-Pronged Approach to Addressing the Marketplace

a. Aligning with the Key Influencers on Asset Gathering

V. Appendix

a. Overview of the Asset & Wealth Management Value Chain

b. Methodology & Reading Guide

d. The Positive Impact of Being a Tier I Partner

More than 20 proprietary exhibits

b. The Increasing Prominence of Pro Buyers

c. Increasing Sophistication of Buying Behaviors

Founders Advisory Ideas & Insights 3 Founders Quarterly 1Q 2012 U.S. Private Client Asset & Wealth Mgmt.

Table of Contents

The sole purpose of Founders’ Ideas & Insights is to give advice and recommendations so that you can position your firm to thrive. In other words, we emphasize the “so what do we do now?” versus “nice to have data” end of the research spectrum. We challenge many of the old norms of the industry and provide advice on how your firm can flourish in the postmodern era. This advice is not only creative and catalyzing, but also pragmatic. We apply a structured problem-solving process that is fact-based and actively engages senior executives by leveraging our deep industry relationships. So, our process is not ivory tower-based (perhaps a little…) but entails active dialogues and debates with executives and leaders who are in the trenches every day. We use original and proprietary data and information. We explore trends and issues, and design proprietary invite-only surveys based upon collaboration with the industry. This issue of Founders Quarterly contains proprietary data from two separate invite-only surveys. More than 30 heads of U.S. retail intermediary asset management distribution completed an invite-only survey. This cohort represents more than $15 trillion in worldwide AUM and roughly $3.5 trillion in retail intermediary assets. The U.S. private wealth management survey cohort consists of roughly 20 senior executives at firms representing 100,000 financial advisors and/or client advisors and approximately $8 trillion in assets under advisement/supervision. Founders’ Ideas & Insights endeavors to deliver advice and recommendations that link together the entire global asset and wealth management value chain. Our research (including multiple proprietary surveys) spans multiple segments such as global retail and institutional asset management distribution and wealth management delivery (including professional buyers) on a global scale.

Methodology Reading Guide

Founders Advisory Ideas & Insights 4 Founders Quarterly 1Q 2012 U.S. Private Client Asset & Wealth Mgmt.

This reading guide is meant to highlight the design elements found in each Founders Quarterly. The quarterly is designed to be very precise (i.e., not longwinded or blow hardly) and written under the belief that it will be read from cover-to-cover. That said, Founders Quarterly is for senior executives at financial services institutions worldwide, so we have intentionally designed the quarterly so that more than one reading style can easily attain valuable ideas and insights from each issue. Flip read: By reading just the headlines (see sample page that follows) on each page clients will be able to absorb several/most of the key action and/or agenda items within each issue. Data read: Each exhibit is designed (see next page) so that clients can easily understand the context of the data and at least one key insight. Page read: While the entire document flows together, each page is self-contained and can be understood in isolation. Summary read: Each issue of Founders Quarterly has a one page introduction/executive summary that highlights key themes in the issue. All Founders’ Ideas & Insights offerings are optimized for tablet reading (although we have only tested on the iPad) and delivered in electronic format only. Please email us to subscribe.

Methodology

Asset managers need to revisit their growth agendas and develop a better understanding of the dynamics impacting their retail intermediary partners

While salesforces are a key ingredient to raising assets, attaining improved productivity from them remains a challenge

5 4 3 2 1

EX 2: Rate the following growth challenges for your firm over the next 5 years. U.S. retail intermediary asset mgmt., Average score (1-not very challenging, 5-very challenging)

Increasing productivity of sales/service professionals

Raising net new money/assets

Securing shelf space for products (not including managed account programs)

Leveraging technology

Retaining top talent

Acquiring top talent

Securing fee-based managed accounts shelf space for products (including all program type)

3.80

3.68

3.61

3.36

3.29

3.13

3.38

2.83 Continuing intermediary firm consolidation

Source: Founders Advisory

Very challenging

Not very challenging

Growth is not easy and is getting more difficult. The challenges confronting managers over the next five years are potentially the greatest the industry has ever experienced. For example, roughly all of the items presented to asset manager executives as potential challenges to growth over the next five years received an average score that suggests significant obstacles (i.e., three or higher.) The competitive landscape is fierce. While most managers addressing retail intermediaries are struggling with raising net new money, the next five years may be the most difficult yet, as this received the highest score among all the potential hindrances to growth. Part of the challenge (how big a part remains up for debate) in raising net new money is focus and alignment of incentives. The industry continues to focus too much on hunting and sales pitches versus delivering world-class client service and relationship management, which play a major role in client retention and obtaining deeper platform and client penetration. And though industry executives believe that net sales is a very important component of overall salesforce compensation, few implement this element effectively. Industry leaders believe that over the next five years (and today for that matter) securing general selling agreements with intermediaries will be more challenging than securing shelf space on managed account platforms. This perhaps goes against conventional wisdom because of the manager vetting and due diligence process that accompanies fee-based managed accounts. However, this distinction speaks more to the increasing importance and intensity of revenue sharing to intermediaries (see exhibit 8 on page 13).

.48 point spread

Growth Challenges

Asset M

anagers

Founders Advisory Ideas & Insights 5 Founders Quarterly 1Q 2012 U.S. Private Client Asset & Wealth Mgmt.

Sample Page

Asset managers would be wise to fine-tune their optimism toward open architecture as it conflicts with what retail intermediaries believe to be true

7

20

73

18

4141

Increase (more opportunity for third-party asset managers)

Stay the same as today Decrease (less opportunity for third-party asset managers)

Asset managers and private wealth managers are not on the same page regarding the future of open architecture

EX 7: Over the next 5 years, what do you believe will happen to open architecture? (select only one), %

Source: Founders Advisory

U.S. retail intermediary asset mgmt. cohort

U.S. private wealth management cohort

Collaboration

We perhaps have a more skeptical view of the future expansion of open architecture (especially compared to the asset manager cohort) as we believe the best case scenario is that it stays the same as today. It is important to understand what we are not saying. We do not believe that retail intermediaries will abandon third-party asset managers or that proprietary asset managers will now top the league tables. Nor do we believe that financial advisors will become stock pickers again—quite the contrary (see next section). However, there are a few dynamics working against the rapid expansion of open architecture (i.e., more opportunity for third-party asset managers) over the next five years. To start, fee-based managed accounts continue to dominate flows (see exhibits 9 and 10 on page 15), which by design narrows the list of available asset managers via due diligence and select/recommended lists. And as financial advisors take on more discretion they will work with fewer managers. On top of all this, several intermediary research and due diligence groups’ resources are being reduced or are capacity constrained and will likely limit the number of managers they cover over the coming years. The increasing costs associated with asset manager distribution, including revenue sharing, may also be a deterrent to increasing the opportunity for third-party managers. We’ve heard this story before (retail intermediaries desire to work more closely with fewer asset managers) and nothing really happened. Based upon the diverging answers from our two cohorts, retail intermediaries believe this time will be different. .

Open Architecture

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Sample Page

This Founders Advisory material is intended exclusively for distribution within the purchasing firm. Distribution to or use by any other firm, subsidiary, affiliate, external field force, or client is prohibited (as is reproduction in whole or part in any media, including electronic or company communications), except by permission. Analysis relies on data sources deemed to be reliable. Although believed to be accurate, this information is not guaranteed and may be incomplete. Founders Advisory. All rights reserved.

management advisory and insights for financial services institutions Founders Advisory

Paul A. Fullerton Managing Principal

617.794.6788 paul_fullerton@foundersadvisory.com P.O. Box 130020 Boston MA 02113 www.foundersadvisory.com

Founders Advisory Ideas & Insights 7 Founders Quarterly 1Q 2012 U.S. Private Client Asset & Wealth Mgmt.

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