Chip Roame MMI 130 4-20.ppt

Getting the Focus Right:Understanding Clients’ Needs

It’s All About the Investor: Connecting Sponsors, Managers, & Advisors to Investor Needs

MMI Annual ConventionApril 20, 2004

04.04.20 – Tiburon Market Seminar © Tiburon Strategic Advisors, LLC™ 2

Source: Tiburon Research & Analysis

Context Setting – Tiburon Strategic Advisors

• Focus on corporate-level strategy (not products or channels)

- Serve senior executives only at financial services companies

- Key services: market seminars, market research, & strategy consulting

- Served ~250 corporate clients since 1998

• Host semi-annual CEO Summit (coming up April 29-30), offer free weekly researches, and offer free business benchmarking tools for all types of advisors

• Chip Roame background- McKinsey & Company- Charles Schwab & Company- Tiburon since 1998

Comments



Context Setting – Today’s Messages

• Huge opportunity: baby boomers, peak earnings/savings years, the liquefaction, and the wealth transfer…

• But impressive competitors from every angle…- Competitive products to SMAs- Competitive channels not using SMAs

• Twenty year game - winners will grasp the needs of rapidly evolving consumers…

- Understanding consumers rapidly evolving needs may become the biggest MMI member challenge as opposed to the issues of products, pricing, distribution, operations, regulatory, and membership that receive today’s focus…

- For instance, MSPs and UMAs are a great step towards addressing consumer needs but they are just a step in the right direction, not the end all…

Comments


We Will Address Four Consumer Segments Today Based on Investable Assets and Summarize Product Opportunities for Each at the End

Facts & Perceptions by Segment

High Net Worth Market

• Definition: $1 to $5 million of investable assets

• Facts:– 4 million

households– Being courted by

many full-service brokers, most bank trust departments, and many fee-only advisors

– Growing very rapidly

Affluent Market

• Definition: $100,000 to $1,000,000 of investable assets


households– Growing rapidly– Being courted by

discount brokers and others

Mass Market

• Definition: <$100,000 of investable assets


households– Still many un-served

households– Being abandoned

by full-service brokers and even some discount brokers

– Need to watch profitability closely so as not to over-serve

Super Affluent Market

• Definition: $5+ million• Facts:

– 250,000 households– Mostly locked into

long-term relationships

– Growing at moderate pace

Source: 11/29/01 Senior Consultant Letter (Winks); 11/01 Financial Advisor; Tiburon Research & Analysis



But Maybe Most Important is How Needs Will Change with Boomers Aging

• Solutions or life events-oriented- Versus returns-oriented- Seek tailored investments to meet goals, not earn returns

• Income & protection-orientation- Versus accumulation & appreciation-orientation of their 40s and

50s- Suggests positive outlook for fixed income, fixed income

annuities, principal protected products, disability insurance, long-term care insurance, and liability insurance

• Sudden money events may change needs further- Tax orientation will increase with more assets- Stock options will shine light on financial planning- Business sales will require forethought- Family office services and elder care to become more important- Life planning to grow as increased wealth allows

reconsideration of goals

• Estate planning focus to increase with age- Suggests positive outlook for trusts, insurance, and charitable

giving

Comments


Context Setting– The Enormous Opportunity: Consumer

Wealth & the Boomer Generation– The Challenge: Increasing Competition

Building a Winning Model– The Traditional Products & Services

Orientation– Clarifying Target Markets– Focusing on Customer Needs

Conclusions & Some Tough Love– Conclusions for Investment Segments– Some “Truths” to Reconsider

Outline


Overall, US Consumers Have Over $17 Trillion of Investable Assets and $46 Trillion of Total Assets; the $17 Trillion Should Grow to $30 Trillion by 2010

Note: Retirement plans include $1.9 trillion of 401k plans; IRAs though of $2.6 trillion are included in the investable assets numberNote: For perspective, it is fun to consider that Bill Gates has approximately $40 billion in Microsoft and his total investable assets peaked a little above $100

billion in 1999Note: Other sources suggest that investable assets total either $14.7 trillion or $18.1 trillion, and total household liabilities are $4.1 trillionSource: 1/22/04 McKinsey Quarterly; 5/22/02 Wachovia Presentation (Spectrem; McKinsey & Co.); 5/9/02 Wachovia Bank Wealth Management Presentation

(Blythe); 5/9/02 Spectrem Presentation; 8/14/01 Wall Street Journal; 7/01 Registered Rep (Cerulli); 6/19/00 Investment News; 12/97 Federal Reserve Bank Flow of Funds Accounts and Consumer Finance Survey; 12/97 First Manhattan Consulting Group; 12/97 Sanford Bernstein Research; 12/97 Access Research; 12/97 ACLI; Tiburon Research & Analysis

US Consumer Net Worth($ Trillions)

$46.5

$17.1

$39.7

$6.8

$7.5

$12.4

$9.6

InvestableAssets

RetirementPlan Assets

PersonalAssets

Other IlliquidAssets

TotalHousehold

Assets

TotalHouseholdLiabilities

TotalHouseholdNet Worth


Super Affluent Households (>$5

Million)13%

High Net Worth Households ($1-$5

Million)34%

Retirement Plans29%

Moderate Net Worth Households ($100,000 -

$1 Million)19%

Lower Net Worth Households (<$100,000)

4%

Endowments & Foundations

1%

Consumers Control Almost Three-Quarters of All Investable Assets and More Specifically, High and Moderate Net Worth Consumers Control Over Half

Investable Assets by Market Segment

Note: Tiburon recognizes the growing opportunities in the corporate services market as well as the leading-edge trends coming from all of the institutional markets



Boomers Account for Almost Half of Millionaires and their Various Life Events Will Increase their Need for Wealth Management

Source: 2/10/04 SEI Email (Smith); 1/7/04 SEI Conversation (Smith); 9/23/03 SEI Presentation (Smith); Tiburon Research & Analysis

Baby Boomer Life Phases & Key Events

Early StagePeak Earnings

& Savings Years

Liquefaction Golden Years

• 30s-40s

• Marriage• Children• Early earnings

years• Business

ventures• Wealth

accumulation• Early divorces

• 50s

• Late divorces• Peak earnings• Peak savings• Vacation homes• Children's

college• Children’s

marriage• Aging parents• Grand children

• 60s-70s

• Retirement• Liquefaction• Rollovers• Stock options• Sales of homes• Wealth transfer

(received)

• 80s-90s

• Long-term care• Disability• Death of spouse• Wealth transfer

(sent)• Charitable giving

Approximate Ages

Key Life Events


The Primary Goal of Investors Switches as They Get Older & Wealthier

Source: 5/9/02 Spectrem Presentation; Tiburon Research & Analysis

Primary Investment Goal

55%48%

45%52%

$1-$5 Million Households(Average Age: 56)

$5+ Million Households(Average Age: 63)

Preserve Wealth

Build Wealth


Beyond the Peak Earnings Years, the Liquefaction of Baby Boomer Wealth Will Continue to Make it a Good Time to be a Financial Advisor

• Liquefaction: Substantial new wealth has been “created” but not “realized” in the count for investable assets or the savings rate

• Examples include:– 401K plans– Stock options– Small business valuations– Real property appreciation

Note: Boomers will start retiring in mass around 2010Source: 3/11/03 First Quadrant Presentation (Arnott); 10/25/01 Portfolio Management Symposium Presentation (Reukeyser); 8/14/01 American Banker; 2/01

Financial Advisor; 7/9/99 San Francisco Business Times; 2/19/96 US News & World Report; 5/95 Money; 4/95 ACLI MAP Survey; 4/95 Sanford Bernstein Research; 4/95 Merrill Lynch, Confronting the Savings Crisis; 11/92 US Bureau of the Census; Current Population Reports; 7/92 Monthly Labor Review, “Trends in Retirement Age by Sex”; 7/92 U.S. Dept. of Labor; 7/92 VIP Forum Research; Tiburon Research & Analysis

Comments


The Long Rising Bull Market of the 1990s Created Unprecedented Wealth in Employer-Sponsored Retirement Plans; These Dollars are Increasingly Becoming IRA Rollovers

Note: One source calculated that $500 billion will roll into IRAs every year staring in 2010Source: 8/14/01 American Banker; 8/01 Money (Cerulli); 7/13/01 Cerulli Presentation (EBRI; Pensions & Investments); 7/01 Registered Rep (Cerulli); Tiburon

Research & Analysis

Annual IRA Rollovers($ Billions)

$127$143

$160$179

$201$226

$255$286

$324

$366

$413

$467

1999 2000 2001 2002 2003 2004e 2005e 2006e 2007e 2008e 2009e 2010e


The Boomer Wins on All Fronts!


Boomer Money Flows

Peak Earnings &Savings Years

LiquefactionYears

Other Factors(Wealth Transfer,Social Security)







Outline


All Types of Competitors are Increasingly Chasing the Emerging Affluent and the Wealth Management Business

Source: 5/22/02 Wachovia Presentation; Tiburon Research & Analysis

Competitive Playing Field

Full-Service Brokers• Segmenting offers• Moving to fee-based

accounts

Independent Advisors• Expanding investment offers• Extending services to wealth

management

CPA & Law Firms

Retail Banks• Up-selling banking

customers• Rebuilding trust

departments

Emerging Affluent & Wealth Management

Business

Private Banks & Money Managers

Insurance Companies

Discount Brokers• Adding help & advice• Moving up market

• Moving down market• Testing new models

• Entering the business• Relying on fee-account

programs• Entering the business• Relying on fee-account

programs at the high-end


Banks and Full-Service Brokers Have Historically Dominated Control of Consumer Investable Assets

Note: This chart excludes all double and triple counting; all dollars are only counted once in the customer-facing channel; excludes corporate, pension, and foreign investments and deposits

Note: Another source suggested that brokerage firms manage $6.5 trillion and that the five wirehouses have $4.0 trillion in assetsSource: 8/13/01 On Wall Street Web Site; 7/13/01 Cerulli Presentation (SIA); 11/6/00 Investment News (Cerulli Associates); 12/97 Securities Industry

Yearbook; 12/97 S&P’s Securities Dealers of North America; 7/22/97 American Banker; 6/97 Financial Planning; 6/97 Dow Jones Investment Advisor; 5/12/97 Pensions & Investments; 4/12/97 American Banker; 3/26/97 American Banker; 3/97 Federal Reserve Bulletin; 12/96 ICI Complex Assets; 12/96 ACLI Life Insurance Factbook; 11/95 Best’s Review; 10/95 VitalSigns Database; Tiburon Research & Analysis

Consumer Investable Assets

Retail Banks $4.4 Trillion

(26%)

Wirehouse, Regional, & Boutique Brokers$6.2 Trillion (36%)

Bank Trust Departments

$1.0 Trillion (6%)

Independent Advisors

$2.1 Trillion (12%)

Insurance Companies$0.3 Trillion (2%)

Mutual Fund Companies

$1.7 Trillion (10%)

Discount Brokers $1.4 Trillion (8%)


But Fee-Only Financial Advisors are Capturing More Client Assets than Leading Full-Service and Discount Brokerage Firms

Source: 2/5/04 TD Waterhouse Conversation (Petrilli); 2/2/04 Investment News; 12/02 Investment Advisor; Tiburon Research & Analysis

Annual Net New Assets($ Billions)

$2.8

$6.4

$3.0

TD Waterhouse DiscountBrokerage

Merrill Lynch TD Waterhouse Fee-OnlyFinancial Advisors


And Discount Broker Charles Schwab is Now Amongst the Leaders in Client Assets

Source: 8/16/01 US Bancorp Piper Jaffray Email (Bjorklund); 8/14/01 Wall Street Journal; 8/13/01 Investment News; 8/12/01 US Bancorp Piper Jaffray Web Site; 8/01 Business 2.0; 1/18/01 Wall Street Journal; Tiburon Research & Analysis

Retail Customer Assets($ Billions)

$1,000 $953

$750 $713

$1,700

Merrill Lynch CharlesSchwab

Citigroup MorganStanley

JP MorganChase







Outline


There is Little Evidence that Recent Scandals are Hurting Mutual Fund Sales; 2003 Net Inflows were $241 Billion, with Eleven Positive Months

Source: 1/12/04 Barron’s (Strategic Insight); 1/3/04 San Luis Obispo Tribune; 12/5/03 Business Week; (Strategic Insight); 11/25/03 Wall Street Journal; 11/7/03 New York Times; Tiburon Research & Analysis

Net Inflows to Equity Funds($ Billions)

$3

$23

$20

$31$29 $29

$27

$31

$25 $25

$3

$4

Jan ‘03 July ‘03 Dec ‘03


Separately Managed Accounts Clearly Dominate the Fee-Accounts Market Amongst the Captive Programs

Assets in Fee-Account Programs$869 Billion($ Billions)

Source: 12/15/03 Investment News (Cerulli); 10/16/03 Financial Planning Newsletter; 5/27/02 Merrill Presentation (Cerulli); 9/23/01 Investment News; 9/30/02 IIR Conference Brochure (Cerulli); 8/7/02 Wealth Management Letter; 1/02 Lockwood Research; 6/5/01 RunMoney Presentation; 4/16/01 RunMoney Presentation; 12/26/00 Business Week (MMI); 11/00 HD Vest Presentation (Pinion); Tiburon Research & Analysis

Separately Managed Accounts

$449

Mutual Fund Wrap

Accounts$154

Broker Wraps

$65

Fee-Based Brokerage Accounts

$201


But While Fee-Accounts Continue to Become a Greater Percentage of Client Assets at the Wirehouses, They are Still a Small Share and SMA Assets Come From a Small Minority of Advisors

Note: Another source said both Merrill Lynch and Smith Barney are higher that the averagesSource: 11/4/02 American Banker; 8/02 US Banker (Cerulli); 1/9/02 American Banker; 10/01 Investment Consulting News (SIA); 8/25/01 AssetMark

Brochure; 7/13/01 Cerulli Presentation (SIA); 7/01 Registered Rep; 5/99 Registered Rep; Tiburon Research & Analysis

Level of Fee-Account Assets at the Wirehouses

6% 5%7% 7%

8%9%

13%

16%16%

1994 1995 1996 1997 1998 1999 2000 2001 2002


And Three-Quarters of Full-Service Brokers Use Just One-to-Three Separate Account Managers Per Client…

Number of Managers Used Per Client

1 Manager

40%

2-3 Managers

35%

4-5 Managers

15%

5 or More Managers 10%

Source: 11/7/03 Legg Mason Advisor Conversation (Rosenfield); 11/7/03 Legg Mason Advisor Conversation (Castle); 11/7/03 Legg Mason Advisor Conversation (Graham); 11/6/03 Legg Mason Advisor Conversation (Barnhill); 11/6/03 Legg Mason Advisor Conversation (Davidov); 11/6/03 Legg Mason Advisor Conversation (Lopez); 11/5/03 Legg Mason Advisor Conversation (Rafalko); 11/5/03 McDonald Advisor Conversation (Battaglia);

11/4/03 McDonald Advisor Conversation (Sikorski); Tiburon Research & Analysis


And Less Than One in Five of Full-Service Broker Clients Seek to Customize Their Separately Managed Accounts

Full-Service Broker Clients Who Customize Their Separately Managed Accounts

Customize Separately Managed

Accounts18%

Don’t Customize Separately Managed

Accounts82%

Note: One source indicated that only 15% of separately managed accounts are customized at the time of set-upNote: Another source also noted that only 30% of accounts receive any special year-end tax treatmentNote: Another source indicated that proprietary programs sponsors customize 25%-35% of separately managed accountsSource: 11/7/03 Legg Mason Advisor Conversation (Rosenfield); 11/7/03 Legg Mason Advisor Conversation (Castle); 11/7/03 Legg Mason Advisor

Conversation (Graham); 11/6/03 Legg Mason Advisor Conversation (Barnhill); 11/6/03 Legg Mason Advisor Conversation (Davidov); 11/6/03 Legg Mason Advisor Conversation (Lopez); 11/5/03 Legg Mason Advisor Conversation (Rafalko); 11/5/03 McDonald Advisor Conversation (Battaglia);

11/4/03 McDonald Advisor Conversation (Sikorski); 6/03 On Wall Street; 7/2/02 Bob Veres Newsletter (Business Week); Tiburon Research & Analysis


And Other Channels Like Fee-Only Financial Advisors (RIAs) Have Not Embraced SMAs Yet; Only 7% Use Separate Account Managers

Investment Products UtilizationAcross All Fee-Only Financial Advisors

No-Load Mutual Funds in Fee-

Accounts61%

Individual Securities in Fee-

Accounts19%

Other Investment Products in Fee-

Accounts5%

Commissionable Investment Products

15%

Source: 5/03 Fee-Only Financial Advisor Best Practices Survey; Tiburon Research & Analysis


Discussing the Ethics of a Pricing Structure is Humorous; The Real Value of Fee-Accounts is That They Promote a Series of Client Oriented Services Like Financial Planning

Source: 6/4/03 Wealth Management Letter; Tiburon Research & Analysis

Advisors Providing a Formal Plan

12%

41%

88%

59%

Commission-Based FinancialAdvisors

Fee-Based Financial Advisors

Provide a Formal Plan

Do Not Provide a Formal Plan


The Investments Process is Being Polarized with Twin Growth Patterns in Both Market-Linked Products and Alternative Investments

Source: 3/11/03 Wall Street Journal; 3/10/03 Wall Street Journal (Van Hedge Fund); 2/3/03 Barron’s; 1/31/03 American Banker; 4/30/02 Wall Street Journal; 11/26/01 Investment News (ICI); 11/20/01 Wall Street Journal; 11/19/01 Investment News (FRC); 11/01 Investment Advisor; 11/01 Traders; 6/11/01 Investment News (Hennessee Group); 3/7/00 Nelson Information Web Site; Tiburon Research & Analysis

Alternative Investments

• Hedge fund assets have exploded

–5,800 funds and $650 billion AUM

• Private equity & venture capital had been prior hot trend

–$350 billion market• Real estate funds may lead in

future–$325 billion market

• Other alternative investments also exist

Market-Linked Investments

• Index funds picking up a greater share of fund flows

–323 funds with $300 billion AUM

–11% of assets and 13% of flows

–Leveraged and inverse index funds also growing in popularity

• Exchange traded funds have exploded

–133 funds with $152 billion AUM

Polarization of Investments Process


Asset Growth of Exchange Traded Funds is Impressive, with 133 Funds Now Having Over $150 Billion

Note: ETFs are less than 1% of the total mutual fund marketSource: 2/9/04 Fortune; 1/31/03 American Banker; 1/3/03 Journal of Indexes; 12/29/02 New York Times; 11/26/01 Investment News (ICI); 11/20/01 Wall

Street Journal; 11/19/01 Investment News (FRC); 11/01 Investment Advisor; 11/01 Traders; Tiburon Research & Analysis

Assets in Exchange Traded Funds($ Billions)

$34

$63

$83

$102

$152

1999 2000 2001 2002 2003


The Ultra High Net Worth Have an Even Higher Tolerance for Alternative Investments; Almost 40% of Their Assets are Placed in These Products

Source: 6/4/03 Trusts & Estates; Tiburon Research & Analysis

Ultra High Net Worth Asset Allocation

Equities, Fixed Income, & Cash

61%Private Equity

14%

Hedge Funds 14%

Real Estate 11%


Hedge Fund Assets Continue to explode and while the Institutional Market Seems to Get the Most

Coverage, Hedge Fund Assets are Dominated by Investments From High Net Worth Investors

US Hedge Funds Assets by Investor Type($650 Billion)

Individuals & Family Offices

55%

Funds-of-Funds19%

Pension Plans8%

Endowments & Foundations

6%

Other12%

Note: Another source said individuals controlled 37% of hedge fund assets, while other amounts came from fund-of-funds at 19%, corporations at 13%, pension plans at 7%, endowments & foundations at 8%, and other at 14%

Note: Only 1.5% of US families qualify to invest in hedge funds; there are about 5-6 million “accredited” investorsNote: Surprisingly only 15%-30% of investments appear to be tax-sheltered (endowments and pensions)Source: 1/27/04 Money Management Executive (Tass); 2/7/03 Barron’s; 12/02 Putnam Lovell/New River Research Report; 12/11/01 Goldman Sachs

Presentation (Hennessee Group); 12/11/01 AXA Rosenberg Presentation (Hedge Fund Research); 6/11/01 Investment News (Hennessee Group); 5/99 Plan Sponsor (Hennessee Group); Tiburon Research & Analysis


Source: 3/00 Harris Partners Comments (Rival Rosenberg); 12/3/99 Mesirow Financial Conversation (Rossman); 12/3/99 Harris Partners Conversation (Martino); 12/2/99 Ivy Asset Management Meeting (Simon); 11/24/99 Collins Associates Conversation (Berens); 10/12/99 Grosvenor Capital Management Meeting (Sacks); 7/99 Investing in Hedge Funds; Tiburon Research & Analysis

There are Four Main Hedge Fund Investment Strategies; High Net Worth Households are Most heavily Invested in Equity Strategies

Multi-Strategy Funds-of-Funds

Substantial stock picking ability

Ability to find arbitrage opportunities between

related securities

Ability to find arbitrage opportunities in the

timing of specific events

Ability to foresee interest rate, currency, and other

movements

EquityStrategies

Arbitrage or Relative Value

Strategies

Event DrivenStrategies

Global Macro Strategies

Hedge Fund Investment Strategies

Hedge FundInvestmentStrategies


There are Four Key Hedge Fund Product Trends


Hedge Fund Product Trends

Hedge Fund Industry Issues

Hedge Funds-of-Funds

Hedge Fund Index Funds

Registered Hedge Funds

Mutual Funds with Hedge Fund Strategies


Tiburon Defines the Key Components of Wealth Management as Three Additional Groups of Services Beyond Investments

Note: Private banking, life planning, and concierge services could also be addedSource: 2/01 Financial Advisor; 4/24/00 Assante Conversation (Bowen);Tiburon Research & Analysis

Investment Management(Including Indexing, Separately

Managed Accounts, & Alternative Investments)

Aggregation & Financial/Tax Planning

Estate Planning (Often Through Life Insurance & Trusts)

Life-Time Risk Management

(Disability, Long-Term Care, Liability,

Annuities)

A Definition of Wealth Management


Over Half of High Net Worth Investors Want Holistic Advice Beyond Investments and Firms Like Merrill Lynch are Really Trying to Broaden their Image

Source: 1/21/03 Wall Street Journal; Tiburon Research & Analysis

Advice & Planning

Total Merrill Program

Beyond Banking

Estate Planning Services

Business Financial Services

Retirement

Credit & Lending

Investments

Tracking Progress

Merrill Lynch


Consumers Value Financial Planning But Less Than 20% of Advisors Use Comprehensive Financial Plans to Determine Their Clients’ Needs

Advisors Using Comprehensive Financial Plans

Source: 5/28/03 Wealth Management Letter (Cerulli); 11/13/02 Wealth Management Letter (Cerulli); Tiburon Research & Analysis

Uses Comprehensive Financial Plans

18%

Does Not Use Comprehensive Financial Plans

82%


Many Boomers are Concerned About Their Ability to Support Themselves if They Develop a Disabling Condition and Many Lack Coverage to Manage these Costs

Do Not Have Enough Savings to Pay for Long-Term Care

63%

Status if Develop a Disabling Condition

Note: Survey was people age 38-55Source: 12/10/01 New York Time; Tiburon Research & Analysis


Life Insurance May Play an Increasingly Important Role; About Half of US Households Say that They Need More Life Insurance

Need More Life Insurance

53%

Do Not Need Additional Life

Insurance47%

Consumers’ Views on Their Life Insurance Coverage

Note: Another study by LIMRA concluded that 38% of Americans believe that they don’t have enough life insuranceNote: The common guideline is to have insurance with a face value of 5-7x one’s incomeSource: 11/00 Investment Advisor; 11/00 Ticker; 5/00 M Financial Group Meeting (US Census Bureau; LIMRA); 9/99 Bank Investment Marketing; Tiburon

Research & Analysis


Trusts Present an Enormous Opportunity; Even $15 Million Does Not Seem Enough to Work With JP Morgan


Comments

• After striking out locally at both bank of America and Wells Fargo, a Tiburon consultant called JP Morgan personal trust services to request marketing materials and discussed opening a $10-$15 million account

• Consultant was advised that JP Morgan’s minimum for a trust account is $30 million

- No other bank unit was equipped to serve the consultant

- No brochures were even available to mail


Family Office Services are Also Growing in Importance

Family Office Services

Source: 9/02 Investment Advisor; Tiburon Research & Analysis

Private Banking

Real Estate Management

Vehicle Management

Family Offices

Household Staff

Management

Bill Pay







Outline


#1: Baby Boomers Account for Over 50% of Full-Service Broker Clients, But It Varies On an Individual Level; this is Similar in Other Markets

Source: 1/9/04 RW Baird Advisor Conversation (Filicky-Peneski); 1/9/04 RW Baird Advisor Conversation (Farron); 1/8/04 RW Baird Advisor Conversation (Busey); 1/8/04 RW Baird Advisor Conversation (Busey); 1/8/04 RW Baird Advisor Conversation (Michels); 1/8/04 RW Baird Advisor Conversation (Garrett); 1/8/04 RW Baird Advisor Conversation (Mertens); 1/8/04 RW Baird Advisor Conversation (Ater); 1/7/04 RW Baird Advisor Conversation (Zeidler); 1/7/04 RW Baird Advisor Conversation (Carter); 11/11/03 Legg Mason Advisor Conversation (Stewart); 11/11/03 Legg Mason Advisor Conversation (Hall); 11/10/03 Legg Mason Advisor Conversation (Freiman); 11/7/03 Legg Mason Advisor Conversation (Rosenfield); 11/7/03 Legg Mason Advisor Conversation (Castle); 11/6/03 Legg Mason Advisor Conversation (Davidov); 11/6/03 Legg Mason Advisor Conversation (Cracraft); 11/5/03 McDonald Advisor Conversation (Battaglia); 11/5/03 McDonald Advisor Conversation (Sikorski); Tiburon Research & Analysis

15%20%

25%30%

40%40%

50%50%50%50%

60%65%65%

69%70%

75%75%

80%

FA #18

FA #17

FA #16

FA #15

FA #14

FA #13

FA #12

FA #11

FA #10

FA #9

FA #8

FA #7

FA #6

FA #5

FA #4

FA #3

FA #2

FA #1

Average 51%

Baby Boomers Clients of Full-Service Brokers


<$100,00011%

$100,000-$1 Million Investable Assets

57%

$1-$5 Million Investable Assets

22%

$5 Million+ Investable Assets

5%

DC Plans & Other Institutional Clients

5%

#2: Many Full-Service Brokers are Focused on Moderate Net Worth & High Net Worth Clients; Fee-Only Financial Advisors Serve a Slightly Wealthier Clientele and Independent Reps Serve More of the Mass Affluent

Source: 1/9/04 RW Baird Advisor Conversation (Filicky-Peneski); 1/9/04 RW Baird Advisor Conversation (Farron); 1/8/04 RW Baird Advisor Conversation (Busey); 1/8/04 RW Baird Advisor Conversation (Busey); 1/8/04 RW Baird Advisor Conversation (Michels); 1/8/04 RW Baird Advisor Conversation (Garrett); 1/8/04 RW Baird Advisor Conversation (Mertens); 1/8/04 RW Baird Advisor Conversation (Ater); 1/7/04 RW Baird Advisor Conversation (DeFrance); 1/7/04 RW Baird Advisor Conversation (Cruse); Tiburon Research & Analysis

Market Segments ServedAcross All Full-Service Brokers


Corporate Executives

32%

Small Business Owners

28%

Professional Occupations

26%

Blue Collar Workers

11%

Inheritors2%

Institutions1%

#3: More Fundamentally, Sources of Wealth Will Continue to Trend Toward Self-Made Households

Full-Service Broker Clients by Type

Source: 1/9/04 RW Baird Advisor Conversation (Filicky-Peneski); 1/9/04 RW Baird Advisor Conversation (Farron); 1/8/04 RW Baird Advisor Conversation (Busey); 1/8/04 RW Baird Advisor Conversation (Michels); 1/8/04 RW Baird Advisor Conversation (Garrett); 1/8/04 RW Baird Advisor Conversation (Mertens); 1/8/04 RW Baird Advisor Conversation (Ater); 1/7/04 RW Baird Advisor Conversation (DeFrance); 1/7/04 RW Baird Advisor Conversation (Cruse); Tiburon Research & Analysis


Retirement Plan Rollovers

36%

Earnings, Inheritance, & Other

Sources of New Money

31%

Business Sales26%

Moved From Other Providers

7%

#4: Rollovers are the Number One Source of Assets for Full-Service Brokers; the Same is True for Both Fee-Only Financial Advisors and Independent Reps; and Rollovers are Also Half of All Fee-Accounts

Sources of New Full-Service Broker Client Assets

Source: 1/9/04 RW Baird Advisor Conversation (Filicky-Peneski); 1/9/04 RW Baird Advisor Conversation (Farron); 1/8/04 RW Baird Advisor Conversation (Busey); 1/8/04 RW Baird Advisor Conversation (Michels); 1/8/04 RW Baird Advisor Conversation (Mertens); 1/8/04 RW Baird Advisor Conversation (Ater); 1/7/04 RW Baird Advisor Conversation (Carter); 1/7/04 RW Baird Advisor Conversation (Cruse); Tiburon Research & Analysis







Outline


Almost Two-Thirds of Newly Affluent Households Prefer to Work with One Advisor

Note: The primary reason given for working with one advisor is to avoid the burden of integrationSource: 9/23/03 SEI Presentation (Smith); Tiburon Research & Analysis

Newly Affluent Households’ Desire to Work with One Advisor

Work with One Advisor

63%

Work with Multiple Advisors

37%


Source: 11/17/03 Cleary Gull Web Site; Tiburon Research & Analysis

Niche Marketing is Critical to Best Addressing Client Needs; For Instance, Milwaukee-

Based Cleary Gull Has a Customized Program for Pilots Called The Pilot Program

• Introduction uses pilot terminology such as engineer, safety, stay on course, etc.

• Custom seminars for pilots of leading airlines

• Services listed for pilots including AA Super Saver 401k Asset Allocation and UAL DAP Asset Allocation

• Specialized questionnaires for pilots from American, United, Delta, and others

• Several ex-pilots on staff for pilot relationships

Comments


Source: 1/22/04 Hanson McClain Conversation (Neeley); 1/21/04 Hanson McClain Email (Neeley); 1/8/04 Hanson McClain Web Site; 1/7/04 Hanson McClain Conversation (Neeley); Tiburon Research & Analysis

And Sacramento-Based Hanson McClain Built a Niche Serving SBC Executives

• About half of the firm’s 2,000 clients are Pacific Bell retirees

– Believes they have captured about 70% market share

• Capitalized on announced telephone company layoffs

– Contacted human resources director– Hired high school kids to put fliers on

windshields– Mailed letters to employees– Faxed fliers to company departments– Placed advertisements in company

newsletters– Sponsored lunches, brought coffee &

doughnuts, attended retirement parties, etc.

Comments







Outline


Conclusions – The Detailed Checklist to Consider…


Checklist by Segment

High Net Worth Market

• Separately managed accounts (of course)

• Want institutional products such as alternative asset classes (hedge funds, venture capital, real estate)

• May see use of custom core index products

• Wealth management becomes more important than investment management

• Family office services emerging

Affluent Market

• Focus on financial planning, individual securities, mutual funds, mutual fund wrap accounts, MSPs, and separately managed accounts

• May evolve into real estate products soon

• Core & explore strategies using combinations of index funds & separate account managers may win out

Mass Market

• Focus on mutual funds, annuities, and bank products

• May evolve to include mutual fund wrap accounts and MSPs

Super Affluent Market

• Already seeing use of custom core index products

• Already accessing institutional products (e.g., 55% own hedge funds)

• Further seeking institutionally-oriented long-term investments – e.g. timber (yes, trees!)

• Wealth management clearly is key offering and family office services growing in importance







Outline


The Industry May Offer a Series of Superficial Responses

Source: 9/22/03 SEI Presentation; Tiburon Research & Analysis

Increased Product Choices

Fee-Based Pricing

Buzz Words Like Wealth &

Life Management

Fee-Only Financial Advisor Goals

Superficial Responses of the Industry


Tough Love Conclusions – Take One – Competition and/or Distribution Channels (Depending on One’s Industry Role)…


Comments

• Fee-only financial advisors (one of the booming channels) are questioning the SMA model, in favor of low cost funds, including index funds and ETFs as the core & explore model continues to gain steam…

• Discount brokers will thrive… Don’t kid yourselves wirehouses, Schwab is adding accounts rapidly and now is back over $1 trillion with an average account size over $100,000…

• Banks… like shooting fish in a barrel but some clients love them…

• CPAs and lawyers may have trust positions with the ultra affluent…

• SMAs are sold, not bought; so how will CPAs, lawyers, banks, discount brokers do?


Tough Love Conclusions – Take Two – Products & Services…


Comments

• SMAs are growing nicely but use is still concentrated

• MSPs and UMAs? Of course…

• Index funds & ETFs have emerged as cost competitive alternatives

• Hedge Funds… that’s 1% and 20%… got to get deeper than that… understanding the risks – not funds-of-unknown-funds… and how do they get values and on statements, etc.?

• Venture capital & private equity… the sequel… Real estate… got to figure this out…

• Wealth management… passing investments in importance?


Tough Love Conclusions – Take Three – Target Markets…


Comments

• Boomers… boomers… boomers…

• High net worth and moderate net worth households are the sweet spot for most advisors…

• Self-made households with new rapidly evolving needs…

• The liquefaction… IRA rollovers #1 and growing…

• Plans for better serving the needs of specific segments?


Tough Love Conclusions - Take Four – Customer Needs…


Comments

• Solutions, not returns!- SMAs can’t be just a product – the four underlying keys are

financial planning, investment consulting, ongoing management, and fiduciary responsibility – focus on applying those to any investment product

- MSPs & UMAs are fulfilling a simplicity need; keep going!- Integrate in order to capture clients looking for solutions…

• Other points- Financial planning will be done in modules…- Customization… really? 10%? Over hyped? Only for the truly

wealthy with real reasons? Maybe offer but not get used?- Tax efficient investing and taxes… Really? Which ones? More

so for high tax-bracket and tax-sensitive investors (no matter wealth)… Remember IRAs!

- Costs… Really? ETFs & index funds now?- Investment management or wealth management for the

boomers?- Family office services & life planning coming now too…- Focus on niches! Deliver custom packaged offers…


Tiburon Strategic Advisors


Tiburon Strategic Advisors

• Research-based strategy consulting firm serving the brokerage and investments market- Core services include strategy consulting, market research, and market seminars- Also provides advice on both venture capital investments and acquisition activity,

and serves on numerous boards throughout all parts of the industry- Sponsor of the Tiburon Toolkit, a set of free benchmarking tools for all types of

financial advisors which gives Tiburon consultants a comprehensive understanding of the business models of advisors

- Publisher of Tiburon Research Releases, a set of free monthly industry issue analysis papers

• Served over 175 corporate clients and completed nearly 500 projects since 1998:- Banks: Bank of America, Wachovia Bank, and US Bancorp- Brokerage Firms: Morgan Stanley, RBC Dain Rauscher, Piper Jaffray, Legg Mason,

and Charles Schwab- Independent Broker/Dealers: M Financial Group, National Financial Partners,

American Express, HD Vest Financial Services, AIG Advisor Group (SFNI), Securities America, MSC, and Assante

- Money Management and Insurance Companies: Fidelity Investments, The Capital Group (American Funds), Rydex Funds, and GE Capital

- eFinance Companies: Financial Engines, Hedge Fund Research, OffRoad Capital, Prima Capital, RunMoney, and OneHarbor

• Research-intensive process comes from managing principal’s previous experience at management consulting firm McKinsey & Co. as well as strategic planning at Charles Schwab & Company

- Firms balances deep industry knowledge with well developed management consulting methodologies, industry experience, and a research aptitude

Documents

Chip Roame MMI 130 4-20.ppt