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  • 1. State of the Managed Accounts Industry ONE VOICE: 2008 FSI BROKER-DEALER CONFERENCE Cerulli Associates January 29, 2008
  • 2. Cerulli Associates Managed Accounts Research <ul><li>Decade-long pioneering coverage and analysis Proprietary database tracking key attributes from more than 330 asset managers and sponsor programs on a quarterly basis Research utilizes qualitative interviews, surveys, and third-party research </li></ul>
  • 3. Agenda <ul><li>Industry Overview </li></ul><ul><li>-Market-sizing </li></ul><ul><li>-Growth rates and drivers of growth </li></ul><ul><li>Overlay and UMA Outlook </li></ul><ul><li>-Industry impact </li></ul><ul><li>-Existing UMA programs </li></ul><ul><li>Role of the Advisor </li></ul><ul><li>-Importance of managed accounts (fee-based advisory) to advisors </li></ul><ul><li>-Advisor usage </li></ul><ul><li>Industry Outlook </li></ul><ul><li>-Role of managed accounts in retirement solutions </li></ul><ul><li>-New entrants to industry </li></ul><ul><li>-Projections </li></ul>
  • 4. How do we progress fee-based advice delivery toward better meeting client goals? How do we reap the benefits of overlay without upsetting the success of existing managed accounts programs? Issues to Ponder ?
  • 5. Industry Overview
  • 6. The Nearly $2.0 Trillion Managed Accounts Marketplace Has Six Program Types Separate account programs are the oldest; UMAs are the newest Source: Cerulli Associates Managed Account Asset Share by Program Type, 3Q 2007 (%)
  • 7. Fee-Based Managed Account Assets Have More Than Tripled Since 1999 Source: Cerulli Associates 3.75-year CAGR of 15.4% $744 b $754 b $612 b $998 b $1.42 t $1.21 t ($ billions) $793 b $1.73 t $1.97 t
  • 8. Managed Accounts Have Increased Dramatically in the Most Powerful U.S. Distribution Channel Wirehouse Client Assets in Managed Account Programs ($ billions) Sources: Cerulli Associates, Company reports Wirehouse activity serves as an industry barometer
  • 9. Discretionary Programs Have Outpaced Nondiscretionary Programs Discretionary vs. Nondiscretionary Managed Account Assets ($ billions) Source: Cerulli Associates An increased number of firms are looking at discretionary programs
  • 10. Managed Accounts Exhibiting Double-Digit Growth Source: Cerulli Associates Advisory success has been widespread 14% $1,970 $35 $154 $214 $229 $513 $266 $559 $825 3Q 2007 ($ bil) N/A $27 $8 $4 N/A N/A Unified Managed Account 22% 18% 21% 34% (6%) Growth rate 15.4% $1,728 $1,424 $1,207 $998 $744 Total managed accounts industry 41.1% $91 $58 $42 $30 $23 Rep as Advisor (0.6%) $276 $250 $235 $220 $150 Fee-Based Brokerage 24.8% $183 $139 $108 $80 $62 Rep as Portfolio Manager 25.6% $403 $298 $229 $174 $126 Mutual Fund Advisory 5.2% $238 $221 $190 $209 $172 Open programs 15.2% $509 $447 $398 $286 $212 Subadvisory programs 11.4% $747 $668 $588 $495 $384 Separate Account Consultant 3.75-Year CAGR 2006 ($ bil) 2005 ($ bil) 2004 ($ bil) 2003 ($ bil) 2002 ($ bil) Program
  • 11. Wirehouses Remain King, but Other Channels Making Strides Source: Cerulli Associates IBD channel ranks 2 nd at 24%+ (IBD at 13% and most of TPV channel at 11%) Managed Accounts by Distribution Channel
  • 12. Wirehouses Claim Top 5 Spots A.G. Edwards acquisition ($39b) will push Wachovia to third place 3Q 2007 Managed Accounts Marketshare Source: Cerulli Associates
  • 13. Formula for Continued Success Source: Cerulli Associates Managed accounts success across programs and channels Boiling down the equation for sustained growth Asset Management Meritocracy Fee-Based Advice Model Modern Portfolio Theory MAGs/Professional Buyer + + + =
  • 14. Market sizing Growth across programs and broker/dealers Growth drivers Recap and Questions ?
  • 15. Overlay and UMA Outlook
  • 16. Defining Overlay Management Overlay is the process of systematically applying individual client account-level intelligence to the investment process Role of Overlay Between Model Portfolio and Client Account Source: Cerulli Associates Overlay Management Asset Manager Client Portfolio Client info Investment Research Trades Trade Decisions Buy AAPL Model Portfolio Buy RIMM Buy GOOG Sell GRMN Buy AAPL Buy RIMM No action Wait to trade
  • 17. Source: Cerulli Associates 100% Separate Accounts (SMA) Separate account via model portfolio UMA Environment Mutual funds ETFs Separate account, plus no-fee mutual funds In the past, advisors’ choice would be all SMA or unallocated mix of SMA and other products UMAs Will Create Flexibility in Programs Previously Constrained by Vehicle Type UMA Example for an $800,000 Client Mutual funds
  • 18. Going Beyond Blended Products; Overlay Portfolio Management Evolves Client Experience Source: Cerulli Associates Product focus Client focus Overlay management poised to be a fundamental component of all UMAs and advice delivery process <ul><li>• Used by MAG or advisor within UMA to blend multiple vehicles into portfolio based on client need </li></ul><ul><li>Enhanced portfolio construction possibilities </li></ul>Stage 3 <ul><li>• B/D s ponsor takes control </li></ul><ul><li>Apply to separate accounts via model portfolios specific to client profile </li></ul><ul><li>Tax optimization </li></ul>Stage 2 <ul><li>Asset-manager generated FOF portfolio of separate accounts, typically using affiliates </li></ul><ul><li>Not client-specific, but rather packaged </li></ul><ul><li>Brings diversified separate account portfolios downmarket </li></ul>Stage 1
  • 19. Enhancing Portfolio Construction Exchange-Traded Funds Separate Accounts Modern Portfolio Construction ? How will better solutions be delivered to clients? Source: Cerulli Associates Passive Management Active Management Investor Time Horizons Liquidity and Distribution Absolute Return Hedge Funds Mutual Funds Individual Equities Bonds
  • 20. Unified Managed Account Programs Source: Cerulli Associates All channels are launching UMA programs, though they are varied … Unified Managed Account Programs, 3Q 2007 70% - 60% 66% 73% 84% 79% 23% 83% 99% % in SMA Packaged 26.3% $392 Brinker Capital Hybrid 3.9% $962 RBC Dain Rauscher Packaged 50.0% $888 Bank of America 10.3% 6.4% 1.3% 10.7% 10.3% 6.7% 4.1% 3Q Growth Hybrid $280 1st Global Hybrid $281 ADVISORport/PFPC Open $1,003 UBS Hybrid $1,092 LPL Financial Packaged $1,190 Lockwood Financial/Pershing Open $13,515 Morgan Stanley Hybrid/Packaged $14,648 Wachovia Packaging AUM ($ millions) Firm
  • 21. Attitudes on Overlay Management Source: Cerulli Associates Asset managers have their doubts about performance enhancement
  • 22. Flexibility Will Continue to Evolve Source: Cerulli Associates How can sponsors and asset managers maintain equation for success in a changing environment? <ul><li>Facilitates pricing flexibility </li></ul><ul><li>Performance transparency </li></ul>Presentation to Client <ul><li>• Band of pricing flexibility allows free market—“range pricing” </li></ul><ul><li>Depends on nondiscretionary and unbundled structure </li></ul>Pricing <ul><li>Hybrid overlay is necessary for holistic portfolios </li></ul><ul><li>Alleviates some asset manager objections </li></ul>Trading Control
  • 23. Source: Cerulli Associates LPL Example: Strategic Asset Management (SAM) and Personal Wealth Portfolios (PWP) Although SAM is established and PWP is fledgling, it will be interesting to follow as a case study ($ millions)
  • 24. Description of overlay management Overlay mechanics vs. paradigm shift Are UMA programs developing the way you expected? Recap and Questions ?
  • 25. Role of the Advisor
  • 26. Advisor Migration Independent Broker/Dealer 88,802 NFS 69,249 Regional 14,285 Insurance 34,800 RIA 13,622 Dually Registered 9,477 Losing Advisors Gaining Advisors Advisors are shifting to more independent distribution channels Sources: Securities Industry Association, Investment News, Financial Planning, Bank Insurance Market Research Group, National Regulatory Services, Cerulli Associates
  • 27. Forces Driving Managed Accounts Source: Cerulli Associates Push and pull factors combine to fuel increased growth B/D Push factors <ul><li>Recurring revenues </li></ul><ul><li>Compliance concerns </li></ul><ul><li>Advisor retention </li></ul><ul><li>Encourages financial planning </li></ul><ul><li>Encourages teams </li></ul><ul><li>Program assets sticky </li></ul>+ Advisor Adoption of Managed Accounts Advisor Pull Factors <ul><li>Professionally outsourced asset management (ProBuyer) </li></ul><ul><li>Pursue more affluent clients </li></ul><ul><li>More time to develop and deepen client relationships </li></ul><ul><li>Increase in compliance oversight </li></ul>=
  • 28. Advisor Compensation by Channel, 2007 Open architecture, fee-based pricing: Everyone starts to look like an RIA Fee-Based Pricing Is Occurring Everywhere Source: Cerulli Associates
  • 29. Client Net Worth, 2005-2007 Source: Cerulli Associates Managed accounts are aiding other channels in delivering advice to $1m-$10m clients… 13.7% 34.2% 44.2% 5.5% 2.4% 2005 RIA Regional Wirehouse IBD 29.2% 44.3% 20.2% 3.3% 3.0% 2005 26.2% 34.9% 29.7% 8.7% 0.5% 2007 20.1% 41.3% 33.1% 3.9% 1.7% 2007 30.5% 44.3% 21.5% 3.0% 0.8% 2005 13.7% 32.7% 41.1% < $250k 33.9% 43.2% 40.4% $250k-$1m 42.5% 22.3% 16.6% $1m-$10m 5.4% 1.3% 0.8% $10m-$25m 4.5% 0.5% 1.2% > $25m 2007 2007 2005 Client Net Worth Range
  • 30. Advisors are Strapped for Time; Outsourcing Asset Mgt to Experts is a Better Approach for Most Source: Cerulli Associates Advisors’ Time Allocation, 2007 Managed accounts address advisors’ needs and facilitate planning-oriented relationships
  • 31. Portfolio Construction, a Growing Challenge Strategies That Would Ease the Portfolio Construction Process, 2007 Advisors are becoming overwhelmed and looking for assistance Source: Cerulli Associates, Advanced Sales Corporation
  • 32. Retirement Income: Consumers Are Biggest Obstacle All Advisor Comparison: Obstacles to Retirement Income Planning, 2007 Retirees could be shocked when looking to create income streams Source: Cerulli Associates, Advanced Sales Corporation
  • 33. Advisors looking more like RIAs Easing portfolio construction for advisors Taking advantage of next-generation programs Recap and Questions ?
  • 34. Industry Outlook
  • 35. Managed Accounts: Fueling the growth of fees All Advisor Comparison: Advisor Opinion of Managed Account Types, 2007 Source: Cerulli Associates, Advanced Sales Corporation
  • 36. Portfolio Construction Tug of War PORTFOLIO CONSTRUCTION DISCRETION Sponsor Advisor Asset Managers Regardless of who controls, the asset manager has a vested interest More scalable/consistent More discipline Value proposition That’s what teams are for More time/dedication Source: Cerulli Associates Customization
  • 37. Ongoing Shift to Consultative Approach Source: Cerulli Associates Is demand for value-added services more than lip service? Sponsors' Greatest Needs from Asset Managers, 2007
  • 38. Most Effective Types of Marketing with Advisors Practice management resonates with advisors Source: Cerulli Associates
  • 39. Differences in Experience Are a Hurdle Source: Cerulli Associates Are the young pups going to teach the old dogs some new tricks? Years of Experience in Position for Wholesalers and Advisors, 2007
  • 40. Overlay Pitfalls Source: Cerulli Associates Presentation to client Change goal dialogue Performance and overlay functionality Communication Sales/Wholesaling Engage asset manager Challenge Suggestion
  • 41. Source: Cerulli Associates Managed Accounts Projections Managed account assets should surpass $3 trillion in 2010 11.3% 14.0% 17.9% 19.6% 11.1%   Growth rate $3,434 $3,091 $2,713 $2,301 $1,923 $1,731 Total managed accounts 27.8% 35.0% 59.3% 72.5% 79.2%   Growth rate $233 $182 $135 $85 $49 $27 Unified managed account programs N/A N/A N/A N/A N/A   Growth rate N/A N/A N/A N/A N/A $276 Fee-based brokerage programs 19.2% 22.2% 31.4% 39.9% 127.7%   Growth rate $577 $484 $396 $301 $215 $95 Rep-as-advisor programs 15.1% 16.8% 18.9% 20.4% 33.1%   Growth rate $468 $407 $348 $293 $243 $183 Rep-as-portfolio-manager programs 16.3% 17.5% 19.8% 23.2% 38.8%   Growth rate $1,127 $970 $825 $689 $559 $403 Mutual fund advisory programs (1.4%) 4.1% 8.0% 9.0% 14.6%   Growth rate $1,035 $1,049 $1,008 $934 $857 $747 Separate account programs 2011E 2010E 2009E 2008E 2007E 2006 Segment
  • 42. Developments on the Horizon <ul><li>Mutual fund share class debate </li></ul><ul><li>Opportunities for private client groups/trust departments and insurance broker/dealers </li></ul><ul><li>Guaranteed sleeves within managed account programs to supplement retirement income solutions </li></ul>
  • 43. Advisor adoption of UMAs Projections Where is the opportunity? Recap and Questions ?
  • 44. Summary <ul><li>Managed accounts growth has been strong across all channels, and across different types of programs </li></ul><ul><ul><li>Continued growth depends on firms continuing to adapt platforms to their advisors </li></ul></ul><ul><li>Managed accounts are leveling the playing field for advice providers </li></ul><ul><ul><li>More competition between channels/firms/advisors – differentiation critical </li></ul></ul><ul><li>Overlay management and UMAs are the path to creating better client solutions </li></ul><ul><ul><li>Progress must be pursued with focus on client and process, not product </li></ul></ul>
  • 45. Further Information www.cerulli.com Jeff Strange Senior Analyst (617) 437-1098 x153 [email_address] Marketing and Business Development (617) 437-0084 [email_address]

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