2Q 2012

U.S. Private Client Asset & Wealth Management II

Founders Quarterly

management advisory and insights for financial services institutions Founders Advisory

Overview of 2Q 2012 Issue of Founders Quarterly: U.S. Private Client Asset & Wealth Management II

Summary: continuing down the path to modernity

In this issue of Founders Quarterly we continue our focus on understanding the way forward for the U.S. private client asset and wealth management marketplace. These first steps are vital in comprehending the key dynamics impacting the postmodern era. The journey to modernity will not only be full of challenges, but also very exciting. We believe that asset managers and private wealth managers must take many of these steps today to be positioned to thrive moving forward. We first examine the performance and effectiveness of asset and wealth managers on several key items impacting their firms. While leaders in the industry perceive they are performing satisfactorily on many items, there are several key areas in which they are underperforming. Notably, both cohorts (i.e., asset managers and wealth managers) believe they are significantly underperforming with regard to marketing/strategic marketing. For U.S. asset managers, we delve into the primary influencers on asset gathering and sales, including revenue sharing’s impact on total assets. We then examine client asset concentration, where there is more at risk than many leaders in the industry perceive. We also analyze the importance of various components of salesforce compensation, sales deployment methodology, and attempts to gain efficiencies via financial advisor segmentation.

For U.S. private wealth managers, we explore the importance of particular functional roles in positively influencing financial advisors’ productivity and effectiveness, including advisor pricing (or rather underpricing, according to industry leaders). We attempt to gauge what financial advisors value and rate the importance of sources of new clients for them. Additionally, we measure the importance of potential corporate initiatives where building robust alternatives capabilities leads the pack. This issue of Founders Quarterly examines the importance of proprietary affiliations (asset management, investment bank, etc.) to private wealth managers (rather lack of importance). Lastly, we attempt to better understand financial advisor and end-client/investor satisfaction levels with their firms. While there are several key agenda items for firms to tackle as they transition to the postmodern era, the importance of excelling at client service and relationship management stand out. Without question, client service has a major impact, perhaps the greatest, on raising new assets—not to mention retaining assets. And we believe that client service and relationship management is really sales in disguise—in a good way. That said, the industry has a long road to travel to transition from a sales-first mindset to a client service-centric approach. While this may or may not be a subtle transition, firms that successfully deliver world-class client service will gather the vast share of assets.

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

Issue Overview

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: continuing down the path to modernity

A. Measuring distribution effectiveness and performance

II. Asset Management: transitioning to a client service-centric approach

B. Key influencers of new sales

1. Source of new assets

1. Tier I partners’ influence on total assets

C. Distinguishing service levels for top tier clients

A. Measuring effectiveness and performance

1. End-client/investors’ satisfaction with their firm provider

III. Private wealth management: finding the right levers to pull in the postmodern era

IV. Appendix

A. Methodology & reading Guide

19 proprietary exhibits

Founders Advisory Ideas & Insights 3 Founders Quarterly 2Q 2012 U.S. Private Client Asset & Wealth Mgmt. II

D. Top 10 client/intermediary asset concentration

1. Aspirational client/intermediary asset concentration

E. Influencing salesforce behavior via compensation

F. Salesforce deployment methodology

G. Financial advisor segmentation

C. Gauging what financial advisors value

D. Prioritizing new initiatives

E. Importance of proprietary affiliations

F. Source of new assets

G. Financial advisor satisfaction with their firm

B. Financial advisor pricing 1. Influencing financial advisor productivity

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 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 (rather wishful thinking) 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.

Founders Advisory Ideas & Insights 4 Founders Quarterly 2Q 2012 U.S. Private Client Asset & Wealth Mgmt. II

Methodology

Asset managers need to transition from solely looking at addressable markets via the lens of channels to adopting a more client-centric approach

Managers continue to mostly deploy by channel, though most have tailored traditional channel definitions to suit their tactic

EX 9: What best describes your primary salesforce deployment? (select only one) U.S. retail intermediary asset mgmt., = 100%

8

8

16

28

40

Source: Founders Advisory

Channel

Territory

Financial advisor-level segments

Product

Firm-level client tiers

Founders Advisory Ideas & Insights 5 Founders Quarterly 2Q 2012 U.S. Private Client Asset & Wealth Mgmt. II

Salesforce deployment methodology Salesforce deployment by channel remains the predominant strategy for retail intermediary asset managers. Territory or geographical deployment is second with 28% of firms utilizing this approach. While most firms have firm-level client tiers (see exhibit 4 on page 8), only 8% of firms deploy their salesforce in this fashion. Traditional channel definitions have little meaning today. Said differently, most asset managers have adjusted strict channel classifications (wirehouse, regionals, IBDs, etc.) to fit into their own methodology, which is somewhat linked to their client tiers. For example, firms may have a wirehouse channel (i.e., BAML, MSSB, UBS, WFA) that also includes a regional and an IBD. Asset managers also create custom channels to boost focus on a subset of intermediaries. For instance, firms attempting to penetrate new intermediaries many times will carve out a customized channel for this endeavor. This is typically just a short-term approach that at some point gets weaved into the overarching client segmentation strategy. In the same vein, while not channels per se, firms have specialist groups that focus on gathering defined contribution (DC) assets from retail-centric intermediaries. This is all to say that asset managers would be wise to be less dependent on channels and focus more on clients. While subtle and partly semantics, simply utilizing new terminology will help firms transition to a client service-centric mindset. Additionally, addressable markets will continue to converge (e.g., traditional retail and institutional delineations) forcing firms to become more client-centric when deploying their distribution strategy.

Sample Page A

sset Managers

Private wealth managers need to allocate more resources and develop creative techniques to helping FAs acquire net new clients

Old school and new school are in a close race for the crown of least important source of new clients for FAs

EX 17: Rate the importance of the following sources of new clients (client acquisition) for financial advisors, U.S. private wealth management, Average score (1=not very important, 5=very important)

Source: Founders Advisory

5 4 3 2 1

Referrals from existing clients

Brand awareness (firm/corporate level)

Referrals from affiliated/ proprietary business units

Marketing/strategic marketing (firm/corporate level)

Social media

Old-fashioned cold-calling

Very important

Not very important

4.57

3.00

2.93

2.86

2.36

2.21

Founders Advisory Ideas & Insights 6 Founders Quarterly 2Q 2012 U.S. Private Client Asset & Wealth Mgmt. II

Source of new assets U.S. private wealth management is a client service driven business. By far and away, the most valuable source of new clients for financial advisors (FAs) is existing clients. Corporate level brand awareness ranks a distant second, while social media and cold-calling are not considered vital sources for acquiring new clients. (It’s likely too early to get a fair read on social media as firms are just starting to learn how to use this tool.) U.S. private wealth management firms struggle to create much value from marketing endeavors. Strategic marketing scores poorly as a source of new clients for FAs (see exhibit 11 on page 14 also). While we don’t have an antidote for this underperformance at this time, it is clear that firms need to rethink their approach. Raising net new assets is a significant challenge to growth for private wealth managers (see exhibit 5 on page 10 of the 1Q issue). And far too often minimal resources are allocated solely to helping existing FAs acquire new clients. The norm is to focus almost exclusively on recruiting new FAs to the firm as the source for net new assets at the corporate level. We believe that helping FAs design and build effective client acquisition programs can be a key ingredient to FA retention. And while senior executives claim that retaining FAs is a priority, more resources and firm focus is typically allocated to recruiting new FAs than serving existing FAs in this manner.

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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2012

Firm Overview Founders Advisory

management advisory and insights for financial services institutions Founders Advisory

Founders Advisory specializes in the global asset and wealth management marketplaces

Founders Advisory is a management consulting advisory firm and provides custom ideas and insights to institutions in the worldwide financial services industry. We serve firms focused on asset and wealth management such as asset managers, wealth managers, brokerage firms, pension consultants, platform providers, insurance firms, technology firms, and capital investors (including venture capital and private equity firms).

About Methodology

•Advice and insights that are focused, actionable, creative, pragmatic, and catalyzing

•Applicable industry experience and know-how

•Client-driven approach

•Ongoing senior executive dialogue

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Founders Advisory 9 Firm Overview management advisory and insights for financial services institutions

Founders Advisory expertise links together the entire value chain and utilizes a combination of qualitative and quantitative techniques

Asset management •Addressable markets analysis •Retail & institutional sales, client service, and relationship management •Organizational structure •Product development

Wealth managers/distributors •Fee-based advice delivery •Integrated wealth management •Platform support & developments •Financial advisors/client advisors

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Founders Advisory 10 Firm Overview management advisory and insights for financial services institutions

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•Advice and recommendations to position your firm to thrive •Advice that is not only creative & catalyzing, but also pragmatic •Original and proprietary data and information •Delivered via:

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Founders Advisory 11 Firm Overview management advisory and insights for financial services institutions

Ideas & Insights leverages deep industry relationships and works closely with senior executives via ongoing dialogues and proprietary invite-only surveys

Founders Notes

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•This is our complimentary quarterly publication exclusively for survey participants •We provide insights from our ongoing knowledge development including multiple global surveys and ongoing walkabouts within the industry

•This is our vehicle for delivering Ideas & Insights on a regular basis •We explore and provide advice for relevant global asset and wealth management issues and problems •Annual cost US$5,000 per institution

•These reports are based on a particular component of the value chain and/or segment of the industry •All reports are linked to multiple surveys and targeted interviews with senior executives •2012 reports cost US$5,000 per institution

Founders Advisory 12 Firm Overview management advisory and insights for financial services institutions

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