2006 Fall FOCUS Investment Conference Bill Whitt Senior Vice President, Strategic Marketing The Northern Trust Company Thr...
Agenda <ul><li>Demography is Destiny: A Look at the Future of the High Net Worth Market </li></ul><ul><ul><li>Observation ...
Projected Annual Growth Rate 2005 – 2015 Source: Claritas, Northern Trust research. The Graying of America <ul><li>Observa...
The Graying of America <ul><li>Implications / Requirements for Success </li></ul><ul><li>Geographical focus on Florida, Ar...
A Growing Diversity of Wealth  Projected Growth of Households  With Annual Income of $100,000+* 2005 – 2015 Source: Northe...
A Growing Diversity of Wealth <ul><li>Implications / Requirements for Success </li></ul><ul><li>Cultivation of more divers...
Money in Motion—The Business Transition Opportunity Business Equity (>500,000) Rollover Assets* (>$500,000) $3,289 bn $1,5...
Money in Motion—The Business Transition Opportunity <ul><li>Implications / Requirements for Success </li></ul><ul><li>Buil...
Agenda <ul><li>Demography is Destiny: A Look at the Future of the High Net Worth Market </li></ul><ul><ul><li>Observation ...
Client Demand for Open Architecture Assets in Separately Managed Account Programs ($ Billions) Source: Cerulli Associates....
<ul><li>The open architecture environment alters management goals, and will lead ultimately to the unbundling of manufactu...
Client Demand for Open Architecture <ul><li>Implications / Requirements for Success </li></ul><ul><li>Accelerated strategi...
Client Demand for Advice Source: Merrill Lynch Cap Gemini 2004 Survey. 25% Risk Management Strategic Asset Allocation Expe...
<ul><li>Future success will require providers not only to invest significantly more in their advisory capabilities, but al...
Client Demand for Advice <ul><li>Implications / Requirements for Success </li></ul><ul><li>Increased compensation expense ...
Market Fragmentation and the Rise of IFAs Overview of the HNW Competitive Landscape Private Banks  and Trust  Companies Wi...
Market Fragmentation and the Rise of IFAs <ul><li>Implications / Requirements for Success </li></ul><ul><li>Localization o...
Convergence of Private Wealth, Trust and Brokerage <ul><li>Observation #7:  The unbundling of manufacturing and distributi...
Convergence of Private Wealth, Trust, and Brokerage <ul><li>Implications / Requirements for Success </li></ul><ul><li>Inte...
Agenda <ul><li>Demography is Destiny: A Look at the Future of the High Net Worth Market </li></ul><ul><ul><li>Observation ...
Migration of Institutional Approaches to the Personal Market *Includes Commodities, Futures, Structured Products, Limited ...
<ul><li>Core-satellite approaches becoming common </li></ul><ul><ul><li>Passive core (providing beta) plus active satellit...
Migration of Institutional Approaches to the Personal Market <ul><li>Implications / Requirements for Success </li></ul><ul...
A New Home for Trust  Personal Trust Assets at Depository Institutions ($ Billions) Source: FDIC. $864 $955 $978 $985 $953...
A New Home for Trust Personal Trusts Source: U.S. Federal Reserve Survey of Consumer Finances. Growth in Investment Assets...
A New Home for Trust <ul><li>Implications / Requirements for Success </li></ul><ul><li>Centralization of trust administrat...
© 2006 Northern Trust Corporation  northerntrust.com Thank You 2006 Fall FOCUS Investment Conference
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Through the Looking Glass

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Top Trends Shaping the Future of Wealth Management

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  • Through the Looking Glass

    1. 1. 2006 Fall FOCUS Investment Conference Bill Whitt Senior Vice President, Strategic Marketing The Northern Trust Company Through the Looking Glass Top Trends Shaping the Future of Wealth Management © 2006 Northern Trust Corporation northerntrust.com
    2. 2. Agenda <ul><li>Demography is Destiny: A Look at the Future of the High Net Worth Market </li></ul><ul><ul><li>Observation #1: The Graying of America </li></ul></ul><ul><ul><li>Observation #2: A Growing Diversity of Wealth </li></ul></ul><ul><ul><li>Observation #3: Money in Motion—The Business Transition Opportunity </li></ul></ul><ul><li>Future of the Distribution Landscape </li></ul><ul><ul><li>Observation #4: Client Demand for Open Architecture </li></ul></ul><ul><ul><li>Observation #5: Client Demand for Advice </li></ul></ul><ul><ul><li>Observation #6: Market Fragmentation and the Rise of Independent Financial Advisors </li></ul></ul><ul><ul><li>Observation #7: Convergence of Private Wealth, Trust, and Brokerage </li></ul></ul><ul><li>Future of the Investment Landscape </li></ul><ul><ul><li>Observation #8: Migration of Institutional Approaches to the Personal Market </li></ul></ul><ul><ul><li>Observation #9: A New Home for Trust </li></ul></ul>
    3. 3. Projected Annual Growth Rate 2005 – 2015 Source: Claritas, Northern Trust research. The Graying of America <ul><li>Observation #1: Two demographic forces—the “graying” of America and the retirement of the baby boomers—will increasingly skew the high net worth market toward those aged 65 and older. </li></ul>Millionaire HHs, Age <65 Millionaire HHs, Age 65+ Millionaire HHs, Age 65+ Millionaire HHs, Age <65 Projected Composition of the High Net Worth Market, 2015
    4. 4. The Graying of America <ul><li>Implications / Requirements for Success </li></ul><ul><li>Geographical focus on Florida, Arizona, and other affluent retiree markets, including new “life-style” communities </li></ul><ul><li>Focus on retirement-income planning and retirement income products </li></ul><ul><li>Integration of long-term care into product/service set </li></ul>
    5. 5. A Growing Diversity of Wealth Projected Growth of Households With Annual Income of $100,000+* 2005 – 2015 Source: Northern Trust analysis of U.S. Census Bureau data. *Income measured in constant 2005 dollars. Projected Percentage of Households With Annual Income of $100,000+* 2015 <ul><li>Observation #2: Population trends are gradually—and permanently—shifting the composition of wealth in the United States </li></ul>
    6. 6. A Growing Diversity of Wealth <ul><li>Implications / Requirements for Success </li></ul><ul><li>Cultivation of more diverse management team and sales force, to tap into minority group networks </li></ul><ul><li>Targeted community outreach and involvement </li></ul><ul><li>Revamped branding and marketing strategies </li></ul>
    7. 7. Money in Motion—The Business Transition Opportunity Business Equity (>500,000) Rollover Assets* (>$500,000) $3,289 bn $1,596 bn $659 $875 Source: Northern Trust analysis of the Federal Reserve Survey of Consumer Finances. Assets Held by Those Aged 55-64 That Will Be Subject to “Liquidity Events” in the Coming Decade *Assets in defined contribution plans, IRAs and Keogh accounts. <ul><li>Observation #3: Although the rollover opportunity has received nearly all the attention, it will be dwarfed over the next decade by the opportunity to capture business assets in transition </li></ul>IRA and Keogh Assets Defined Contribution Assets
    8. 8. Money in Motion—The Business Transition Opportunity <ul><li>Implications / Requirements for Success </li></ul><ul><li>Build out of middle-markets and small-business banking capabilities </li></ul><ul><li>Development / acquisition of business advisory expertise </li></ul><ul><li>Cultivation of strong relationships with local accounting firms and key influencers for small- and medium-sized businesses </li></ul>
    9. 9. Agenda <ul><li>Demography is Destiny: A Look at the Future of the High Net Worth Market </li></ul><ul><ul><li>Observation #1: The Graying of America </li></ul></ul><ul><ul><li>Observation #2: A Growing Diversity of Wealth </li></ul></ul><ul><ul><li>Observation #3: Money in Motion </li></ul></ul><ul><li>Future of the Distribution Landscape </li></ul><ul><ul><li>Observation #4: Client Demand for Open Architecture </li></ul></ul><ul><ul><li>Observation #5: Client Demand for Advice </li></ul></ul><ul><ul><li>Observation #6: Market Fragmentation and the Rise of Independent Financial Advisors </li></ul></ul><ul><ul><li>Observation #7: Convergence of Private Wealth, Trust, and Brokerage </li></ul></ul><ul><li>Future of the Investment Landscape </li></ul><ul><ul><li>Observation #8: Migration of Institutional Approaches to the Personal Market </li></ul></ul><ul><ul><li>Observation #9: A New Home for Trust </li></ul></ul>
    10. 10. Client Demand for Open Architecture Assets in Separately Managed Account Programs ($ Billions) Source: Cerulli Associates. $386 $409 $433 $534 $614 $749 $351 Proprietary Manager Programs Third-Party Manager Programs <ul><li>Observation #4: HNW investors’ embrace of open architecture—seen most prominently in the growth of the SMA market—will permanently change the nature of the wealth management business </li></ul>
    11. 11. <ul><li>The open architecture environment alters management goals, and will lead ultimately to the unbundling of manufacturing and distribution for most providers </li></ul>Client Demand for Open Architecture Proprietary Product Capabilities Non-Proprietary Product Platform Partially Unbundled Wealth Management Model Advisor Client Proprietary Product Capabilities Advisor Client Vertically Integrated Wealth Management Model Management’s goals are to maximize profitability of proprietary products… … and to incentivize advisors to increase sales of proprietary products Management’s goals are to maximize profitability of proprietary and non-proprietary capabilities… … and to incentivize advisors to increase sales of proprietary and non-proprietary products Source: The VIP Forum.
    12. 12. Client Demand for Open Architecture <ul><li>Implications / Requirements for Success </li></ul><ul><li>Accelerated strategic decision-making around unbundling and core competencies </li></ul><ul><li>For those firms focused on distribution: </li></ul><ul><ul><li>Integration of open architecture into product/service set </li></ul></ul><ul><ul><li>Rethinking of investment strategy and approach </li></ul></ul><ul><ul><li>Rethinking of value proposition and competitive differentiators </li></ul></ul><ul><li>For those firms focused on manufacturing: </li></ul><ul><ul><li>Strengthening of ties with non-proprietary distribution channels </li></ul></ul><ul><ul><li>Rationalization of investment offerings </li></ul></ul><ul><ul><li>Focus only on those capabilities that are truly differentiating </li></ul></ul>
    13. 13. Client Demand for Advice Source: Merrill Lynch Cap Gemini 2004 Survey. 25% Risk Management Strategic Asset Allocation Expertise Global Advice Financial Planning 48% 13% 58% 16% 57% 10% 57% 11% 55% 73% 73% 71% 67% 66% Substantial Increase in Expectations Slight Increase in Expectations <ul><li>Observation #5: Growing knowledge of investments on the part of the high net worth—and the growing complexity of their finances—will significantly raise the level of qualifications and expertise required of advisors </li></ul>Change in HNW Clients’ Expectations of Their Advisors
    14. 14. <ul><li>Future success will require providers not only to invest significantly more in their advisory capabilities, but also to create a new value proposition built around the concept of collaboration </li></ul>Client Demand for Advice <ul><li>Trustee/Custodial services focused on administration and statementing </li></ul><ul><li>Advisor-dependent individuals </li></ul><ul><li>Quarterly access to information </li></ul><ul><li>Purchase of insurance, mutual funds or other investment products from companies specializing in those products </li></ul>Source: Spectrem High Net Worth Advisor Insights, 3/05. Transactional Collaborative <ul><li>Wealth Management providing holistic advice-based services </li></ul><ul><li>Sophisticated, educated clients that like to discuss various strategies and alternatives </li></ul><ul><li>Online real-time information and balances </li></ul><ul><li>More time spent with clients due to ongoing discussion and contact </li></ul><ul><li>Open architecture </li></ul>Ongoing Evolution of Client-Advisor Relationship
    15. 15. Client Demand for Advice <ul><li>Implications / Requirements for Success </li></ul><ul><li>Increased compensation expense </li></ul><ul><ul><li>Upskilling of advisors through training and licensing </li></ul></ul><ul><ul><li>Higher cost of hiring experienced advisors </li></ul></ul><ul><li>Integration of advice and collaboration into value proposition </li></ul><ul><li>Change management—redefinition of role of relationship manager </li></ul>
    16. 16. Market Fragmentation and the Rise of IFAs Overview of the HNW Competitive Landscape Private Banks and Trust Companies Wirehouse/ Investment Bank Brokerages Mutual Fund Companies and Discount Brokerages Regional and Independent Broker Dealers HNW Asset Managers Independent Financial Advisors Life Insurance Companies $2.5 Trillion* $3.3 Trillion $1.6 Trillion $0.9 Trillion $1.0 Trillion $1.0 Trillion $0.9 Trillion Number of Firms 200+ 10 500+ 1,000+ 500+ 8,000+ 500+ *Includes $0.7 trillion in Bank Broker-Dealer channel. Source: Cerulli, The VIP Forum, Northern Trust research; data as of 12/31/05. HNW Assets Under Advisement 23% 29% 14% 8% 9% 9% 8% % Share 24-Month Change In Share -3% +1% - +1% - +1% - <ul><li>Observation #6: Demand for independent advice and open architecture will lead to the further fragmentation of distribution and will shift power to independent financial advisors </li></ul>
    17. 17. Market Fragmentation and the Rise of IFAs <ul><li>Implications / Requirements for Success </li></ul><ul><li>Localization of competition </li></ul><ul><li>Increased emphasis on “personalized” service—connection to clients </li></ul><ul><li>Commitment to open architecture </li></ul><ul><li>Focus on financial consulting and financial planning capabilities </li></ul>
    18. 18. Convergence of Private Wealth, Trust and Brokerage <ul><li>Observation #7: The unbundling of manufacturing and distribution will accelerate the shift to relationship models built around advice </li></ul><ul><li>Private wealth, trust, and brokerage will ultimately converge on a single model centered on a generalist financial advisor who employs a planning-based approach and relies on open architecture </li></ul>Portfolio Manager, Trust Administrator or Broker Generalist RM New Relationship Model Old Relationship Model Relationship models built around proprietary investment management, with portfolio manager, broker, or trust administrator serving as the RM Proprietary Investments Access to Product Specialists As Needed Open Architecture Access to Product Specialists As Needed Financial Plan Relationship models built around advice capabilities, with a generalist financial advisor as RM, and employing a financial planning-based approach to developing relationships
    19. 19. Convergence of Private Wealth, Trust, and Brokerage <ul><li>Implications / Requirements for Success </li></ul><ul><li>Integration of brokerage into private client offering </li></ul><ul><li>Reorganization of sales and service model around a generalist relationship manager supported by product specialists </li></ul><ul><ul><li>Removal of product “silos” </li></ul></ul><ul><li>For banks: acceptance of lower margins, higher variable pay </li></ul>
    20. 20. Agenda <ul><li>Demography is Destiny: A Look at the Future of the High Net Worth Market </li></ul><ul><ul><li>Observation #1: The Graying of America </li></ul></ul><ul><ul><li>Observation #2: A Growing Diversity of Wealth </li></ul></ul><ul><ul><li>Observation #3: Money in Motion </li></ul></ul><ul><li>Future of the Distribution Landscape </li></ul><ul><ul><li>Observation #4: Client Demand for Open Architecture </li></ul></ul><ul><ul><li>Observation #5: Client Demand for Advice </li></ul></ul><ul><ul><li>Observation #6: Market Fragmentation and the Rise of Independent Financial Advisors </li></ul></ul><ul><ul><li>Observation #7: Convergence of Private Wealth, Trust, and Brokerage </li></ul></ul><ul><li>Future of the Investment Landscape </li></ul><ul><ul><li>Observation #8: Migration of Institutional Approaches to the Personal Market </li></ul></ul><ul><ul><li>Observation #9: A New Home for Trust </li></ul></ul>
    21. 21. Migration of Institutional Approaches to the Personal Market *Includes Commodities, Futures, Structured Products, Limited Partnerships, and Charitable Gift Funds. Source: Spectrem 2005 UHNW survey. Percent of Investment Portfolio Allocated to Alternative Assets (By Level of Client Net Worth) <ul><li>Observation #8: The high-net-worth segment’s embrace of institutional approaches—seen most prominently in increased use of alternatives and investment consultants—will dramatically reshape the investment landscape </li></ul>
    22. 22. <ul><li>Core-satellite approaches becoming common </li></ul><ul><ul><li>Passive core (providing beta) plus active satellites (providing alpha) </li></ul></ul><ul><li>Approach to asset allocation focused on “aggressive” diversification </li></ul><ul><li>Greatly increased allocations to alternatives </li></ul><ul><ul><li>Up to 30%, with typical allocations ranging from 10% to 20% </li></ul></ul><ul><li>Significantly decreased allocations to domestic equities </li></ul><ul><li>Growing tendency to evaluate portfolios on an absolute return basis </li></ul><ul><li>Adoption of investment consulting approaches </li></ul><ul><ul><li>Access to “best-in-class” managers </li></ul></ul><ul><ul><li>Use of consultants and RFPs </li></ul></ul>Migration of Institutional Approaches to the Personal Market Portfolio Trends Among the HNW Source: Northern Trust Won/Lost Bid Research program. <ul><li>Increasing prevalence of institutional approaches to investments will ultimately push manufacturers to adopt more focused value propositions as asset-class or investment style specialists </li></ul>
    23. 23. Migration of Institutional Approaches to the Personal Market <ul><li>Implications / Requirements for Success </li></ul><ul><li>Build out of investment consulting capabilities </li></ul><ul><li>Development of proprietary alternatives products to maintain profitability </li></ul><ul><li>Redefinition of the role of the portfolio manager </li></ul><ul><ul><li>Asset allocation </li></ul></ul><ul><ul><li>Manager selection, not stock selection </li></ul></ul>
    24. 24. A New Home for Trust Personal Trust Assets at Depository Institutions ($ Billions) Source: FDIC. $864 $955 $978 $985 $953 $975 Unmanaged assets Managed assets <ul><li>Observation #9: Evolution of investment marketplace, investor behavior and demographic trends are permanently reducing the demand for personal trust services </li></ul>
    25. 25. A New Home for Trust Personal Trusts Source: U.S. Federal Reserve Survey of Consumer Finances. Growth in Investment Assets of U.S. Millionaire Households, by Product or Account Type, 1998-2004 -41% 92% $20MM+ HHs $1MM – $20MM HHs <ul><li>Personal trust will ultimately find its niche in the ultra-high-net-worth segment, where trust services will continue to enjoy strong demand </li></ul>
    26. 26. A New Home for Trust <ul><li>Implications / Requirements for Success </li></ul><ul><li>Centralization of trust administration and servicing into local hubs (similar to developments in lending) </li></ul><ul><li>Centralized portfolio management for all but the largest trust accounts </li></ul><ul><li>Development/acquisition of “esoteric” capabilities of interest to the ultra high net worth </li></ul><ul><ul><li>Delaware trusts, dynasty trusts, offshore trusts, etc. </li></ul></ul>
    27. 27. © 2006 Northern Trust Corporation northerntrust.com Thank You 2006 Fall FOCUS Investment Conference

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