Founders advisory insights for financial services

Founders management advisory and insights for financial services institutions

Advisory
4Q 2011

Founders Quarterly The Postmodern Global Asset and
Wealth Management Era
Preview Issue

Contents

1. Introduction 3. The U.S. Retail Intermediary Asset
Management Marketplace Founders Advisory is a
Ideas and Insights Overview management consulting
Key Attributes The Future of Open Architecture advisory firm and
Founders Quarterly provides custom ideas
Growing Importance of Relationship Management and insights to
Founders Reports and Client Service institutions in the
Methodology for Upcoming Report Finding Future Flows worldwide financial
services industry, serving
Forthcoming Themes for Ideas and Insights 4. Appendix firms focused on global
asset and wealth
2. The Postmodern Global Asset and Wealth How to Subscribe to Ideas and Insights
management such as
Management Era Founders Advisory Overview asset managers, wealth
Increasing Complexity of the Industry Value managers, pension
Chain consultants, brokerage
firms, platform
Manufacturing
providers, insurance
Research firms, technology firms,
and capital investors
Assembly (including venture
Platform capital and private equity
firms).
Distribution

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.

4Q 2011 Preview Issue Founders Advisory www.foundersadvisory.com 2

Founders Quarterly 1. Introduction

Founders Advisory delivers advice and insights that are actionable, focused,
creative, pragmatic, and catalyzing

Introduction
Overview We focus on giving advice and recommendations. In other words, we
The purpose of this issue of Founders Quarterly is to provide an emphasize the “so what do we do now?” versus the “nice to have
introduction to Founders Advisory’s Ideas and Insights knowledge data and information” end of the spectrum of knowledge
services. The overview summarizes our methodology and highlights development. We also apply a structured problem-solving process
important features. We then describe the Founders Quarterly and that is fact-based. We iterate this process via active dialogues and
Founders Reports knowledge offerings. We also provide a debates with leaders in the industry.
methodology for our forthcoming report on the U.S. retail
intermediary asset management marketplace. Founders Advisory’s management has a proven history of advising
leading financial services firms and developing innovative
Next we provide a primer on the postmodern global asset and wealth knowledge and insights. We have authored numerous reports and
management era. In this section we set the stage for Ideas and Insights worked on several management consulting engagements with topics
from a primarily macro perspective. We will examine many of these including retail and institutional asset management global
items in more detail over the coming quarters. We then provide a distribution, wealth management, professional buyers, product
preview of our recent knowledge effort focused on the U.S. retail strategy, managed account advisory, and platform development—all
intermediary asset management marketplace. on a global scale.

Ideas and Insights Overview Key Attributes
Founders Advisory concentrates on strategic distribution and
• Focus on delivering actionable advice
business issues impacting the global asset and wealth management
marketplaces. We use in-depth original and primary knowledge
• Provide innovative solutions to thrive in the postmodern era
development to generate actionable Ideas and Insights catered to
senior management. • Analyze marketplace with a global perspective
Founders’ Ideas and Insights leverages deep industry relationships and
• Emphasize things that matter from both a macro and micro
works closely with senior executives via ongoing dialogues and
perspective
proprietary surveys. We explore problems and trends, and design
surveys based upon direct feedback and collaboration with industry
executives.


Our Ideas and Insights knowledge offerings include both
Founders Quarterly and Founder Reports

Founders Quarterly
Overview Founders Advisory’s management has conducted more than 100
Founders Quarterly is our vehicle for delivering Ideas and Insights on interviews and discussions with asset management distribution
a regular basis. We explore and provide advice for relevant global leaders over the past 6-12 months. These dialogues have helped to
asset and wealth management issues and problems supported by our shape many of the key ideas and insights presented in this report.
deep industry knowledge, applicable senior-level industry experience,
and in-depth knowledge development and problem-solving process. Additionally, Founders Advisory conducted an invite-only online
Each quarterly issue draws upon our ongoing dialogues with senior survey during September 2011 that was completed by more than 30
executives from around the world and our multiple ongoing invite- heads of U.S. retail intermediary distribution. These participants
only proprietary surveys. We distribute an issue each calendar quarter represent more than $4 trillion in U.S. retail intermediary assets and
in electronic format. roughly $18 trillion in worldwide assets under management.

Founders Reports For more information on this report and a preview including
Founders Reports are based on a particular component of the global proprietary survey insights, please see section three below.
asset and wealth management marketplace and/or value chain. All
reports are directly linked to a proprietary survey and targeted Forthcoming Themes for Ideas
interviews with senior executives in the industry and supported by our and Insights
in-depth knowledge development and problem-solving process. For
more on Founders Reports knowledge services see below for a • The transformation of U.S. private wealth management
description of our methodology for an upcoming report. delivery

• The state of U.S. institutional asset gathering
Methodology for Upcoming Report
• The worldwide influence of professional buyers
Founders Advisory is launching a report on the U.S. retail
intermediary asset management market in early November 2011 (see • Worldwide asset management sales and service dynamics
appendix for purchasing details). This Founders Report is the
culmination of a robust qualitative and quantitative knowledge effort. • Delivering private wealth management in emerging markets


2. The Postmodern Global Asset and Wealth
Founders Quarterly
Management Era

Winning firms will make significant strides sooner rather than later
to adapt their strategy to the postmodern era
The Postmodern Global Asset
Overview The lines that once divided and defined the various segments of the
and Wealth Management Era industry are quickly being erased. For example, asset manager
The postmodern era (post-crisis) is shaping up to be the most addressable markets continue to converge as buying behaviors
exciting yet for the global asset and wealth management worldwide increase in sophistication. Wealth management firms
marketplace. The last four-plus years have certainly been more and more are serving both individuals and institutions. At the
interesting—to say the least—as the global financial crisis has same time, legacy pension/investment consultants are attempting to
accelerated the transformation of the industry that arguably had offer new products and services and penetrate new markets,
already begun. This shock to the system is helping a largely including retail.
reluctant industry embrace modernity on many fronts, however
slowly. The industry is becoming truly global in nature (if it isn’t already),
adding to the difficulty in navigating the postmodern era. This is
There is a lot at stake. After all, this is a client-centric industry happening on two dimensions. First, there are firms aspiring to
where the primary function is to advise institutions and individuals address clients and asset pools worldwide by building a proverbial
on how best to save, invest, and allocate their capital to meet long- global footprint. And second, while many firms will remain local,
to short-term liabilities, which remain woefully underfunded. And their clients are demanding investments and solutions from around
regardless of the lens a person looks through, the global asset and the globe, including both the developed and developing regions.
wealth management industry continues to be challenged in many
areas. 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
The winning firms will have the courage to take steps today to adapt understand. The industry also still needs to (re)convince investors
to the postmodern era. For example, private wealth management (both individual and institutional) that it has the right set of advisory
firms that make long overdue investments in platform development tools and investment solutions to meet their long- to short-term
and other technology solutions will be well positioned to achieve aspirations and liabilities. Collectively, this is all working to shape
positive net new client gains. Asset managers that grasp new client the postmodern era, which is largely why this period will be
service and sales approaches on a global scale will be rewarded over particularly exciting.
those firms that persist in holding tightly to the old norms of
distribution.


The level of ambiguity in the industry is at an all-time high, while at the same time
the need to move forward with investments into the business is imperative

The postmodern era is sparking new debates and Welcome to the Founders Quarterly. We look forward to having you
accelerating longstanding industry trends along for the ride as we decipher the next era of the global asset and
Sampling of trends and issues that industry executives are wealth management marketplace. As the accompanying thought
confronted with as they transition to the postmodern era bubbles highlight, there are plenty of items to debate over the coming
quarters and years.
Increasing sophistication of
Re-regulation client needs Increasing Complexity of the
Industry Value Chain
Total balance
sheet advice Without question, the global asset and wealth management
Retirement The age of thrift value chain is growing in complexity. While several firms
have a long history of competing within multiple sectors of
the industry, there has been a recent heightened interest of
Addressing emerging firms tapping into potentially new revenue streams.
Going global markets Nowhere is this more evident than within the assembly (see
Transparency
page 9 for definition) section of the value chain. Indeed,
you’d be hard-pressed to hear an industry CEO utter more
Money in motion than a few words without mentioning how they are
Risk management positioning their firm to offer “solutions,” which Founders
Solutions and advisory
Advisory considers to be part of assembly (see diagram on
delivery
page 9).
Separation of Alpha
Behavioral client from Beta In the remainder of this section we describe the five
Fiduciary duty and segmentation components of the industry value chain and provide
objective advice examples of core functions within each. We then review
Underfunded liabilities some relevant trends within each component.
Source: Founders Advisory


The global asset and wealth management value chain is growing in complexity as
firms continue to extend into areas that many times are not their core capabilities

1 2 3 4 5

Manufacturing Research Assembly Platform Distribution

•Professional •Vetting and •Designs and •The standardized •The delivery
Description manufacturing of monitoring of implements total books and records mechanism including
products such as asset professional product portfolio solutions system financial advisors,
management and manufacturers including CIO •Support a suite of pension field
insurance products • Often referred to as outsourcing and/or products, solutions, consultants, and
professional buyers implemented and services online delivery
and/or due diligence consulting

•Perform security •Perform due diligence •Perform total •Perform custody, •Provide access to
research and selection portfolio management clearing, and products and services
• Make product (including asset recordkeeping
Core •Provide portfolio and recommendations allocation) mostly as •Deliver advice and
Functions* risk management the primary fiduciary •Design and support guidance
•Maintain product technology and
•Develop products select lists and/or buy •Develop packaged advisory tools •Perform client service
lists solutions and hybrid and sales for either retail
•Provide client advisory programs •Perform sales and and institutional clients
services and sales service support or both

•Provide product
management and
development
Source: Founders Advisory, * List not exhaustive


Industry influence continues to flow from asset managers to assembly-centric
services and distributors

Asset manager- Research- Assembly-
centric centric centric

Manufacturing Distinctiveness will not be found in an asset manager’s
corporate structure, but rather in its sales and service approach and
No component of the value chain has experienced more unbundling delivery model. (Of course good investment performance helps as well.)
over the last several years than manufacturing. The advent of open Founders Advisory believes that asset managers need to re-think and
architecture is chiefly to blame as it has driven a spike into asset adapt their addressable markets approach to thrive in the
managers bundling the entire chain together for clients. While asset postmodern era.
management will remain a key ingredient, much of the influence has
transitioned to professional buyers (including research and Research
assembly) and platform providers. The professional vetting of asset managers and other manufactured
products will continue to be a crucial component in the overall delivery
Asset managers will continue to feel pricing pressure. The overall of asset and wealth management to both individuals and institutions.
industry revenue pie is feeling pressure to shrink and the economic Though there are challenges to overcome for this segment to enter the
rents are more and more favoring other components such as postmodern era.
distribution and assembly. That said, asset management will remain
the most profitable link within the global asset and wealth Firms within the research component of the industry are being forced to
management chain for the foreseeable future. enter new markets and offer a broader suite of products and services.
Recent consolidation has highlighted a desire to ramp up scale and
There will continue to be a diverse set of asset managers. The obtain new capabilities such as hedge fund and private equity research
boutique model will remain viable even in the age of multi-trillion- and coverage of emerging market located managers. Research-only
dollar firms as low barriers to entry endure. Also, both public and firms are being urged by their clients to provide more assembly services
private firms will continue to coexist. This is all to say that multiple and fiduciary-based solutions including CIO outsourcing and/or
models can thrive—stand-alone boutiques, multi-boutique implemented consulting.
arrangements, and bundled goliaths.
Assembly
Yes, clients want solutions. You see this in the U.S. market with the
growth of target-date funds within 401(k) plans and the rapid growth


Distinctive advice delivery and next-generation platform development are critical
elements for the future of retail and institutional wealth management
Next-generation platforms will be global and serve across of fee-based managed account programs at private wealth
Overview
markets with robust capabilities, products, and services management firms. Worldwide there is increased demand from
institutions and family offices for CIO outsourcing and/or
Schematic of centralized platforms with sample services implemented consulting. Much of the postmodern era will be defined
serving both institutional and retail markets worldwide over the coming years by the shakeout of the intense competition and
convergence currently happening within this segment of the value
chain.
Institutional Retail Platform
Founders Advisory believes that now more than in any other era the
platform can be truly distinguishing for firms. Platforms can no
longer mask that their systems are essentially held together with
bubble gum and chicken wire. While failure to complete
or integrate acquisitions is partially to blame,
underinvestment is the primary culprit. Winning firms in
Worldwide Platform the postmodern era will work off of robust and globally
linked platforms.
Books & Records Products & Services Research & Assembly
Distribution
• Recordkeeping • Investments • Due diligence The delivery mechanism is essential for the global asset and
• Multi-currency • Planning • Recommendations wealth management marketplace to function. The distributor
• Multi-registration • Banking • Portfolio solutions is principally the linchpin holding the entire chain together
• Sub-accounting • Lending • CIO outsourcing for both institutional and individual investors that continue to
• Cost-basis • Risk mgmt. demand more advice. The industry is making a renewed push
at cross-selling, despite historic success being elusive. Who
can blame them? Founders Advisory believes that firms
Source: Founders Advisory essentially have no choice but to try as an attempt to validate
their corporate structure.


3. The U.S. Retail Intermediary Asset
Founders Quarterly
Management Marketplace

The U.S. retail intermediary asset management marketplace is large and growing,
and is transforming more than most addressable markets

The U.S. Retail Intermediary Asset how these allocations should shift in the future. It also advises on how
firms should restructure their approach and where to focus resources in
Management Marketplace this addressable marketplace to be better prepared to serve the key
Likely more than any asset manager addressable marketplace, U.S. influencers and thrive in the postmodern era. The remainder of the
retail intermediary players continue to grip firmly to the old norms of section provides a snapshot of this upcoming report.
distribution, despite clear evidence of change such as the increasing
sophistication of buying behaviors, prominence of fee-based advisory The Future of Open Architecture
programs, and the convergence of financial advisor-based channels, to Obviously, without open architecture there would not be much of a
name a few. retail intermediary marketplace for third-party asset managers. While
we believe open architecture will remain vibrant (outside the U.S. is a
At the same time, the competitive landscape is intensifying. It is one different story), headwinds such as low comparable profits at
of the few addressable markets positioned for net new money flows intermediaries, potentially heightened focus on proprietary products,
largely sourced from defined contribution plans. U.S. high- and ultra- dominance of a select few managers, and financial advisors purchasing
high-net-worth individual investors continue to control an extremely securities directly could all spoil the party.
large asset pool. Additionally, individuals are lessening weightings to
The industry is perhaps overly optimistic (and historically
heavily U.S.-biased portfolios by seeking to allocate capital to
spoiled) on the outlook for open architecture
developing markets and other non-U.S. investments. Consequently,
there is an abundance of new entrants from around the world and Over the next 5 years, what do you believe will happen to open
several existing participants that are doubling down on the U.S. retail architecture? U.S. retail intermediary asset mgmt., %
intermediary asset management marketplace
Increase (more
71
opportunity for third-
Founders Reports will delve into the above issues and trends and party asset managers)
many more in a forthcoming report on the U.S. retail intermediary
22
asset management marketplace (see page 5 for methodology). The Stay the same as today
report examines the profitability and growth challenges the industry is Decrease (less
facing over the coming years including the future of revenue sharing opportunity for third- 7
and tier-one distributor partners. This report analyzes current manager party asset managers)
distribution resource allocations by functional roles and advises on Source: Founders Advisory


Delivering world-class client service and relationship management will be a key
driver to asset gathering and firm profitability

Growing Importance of Relationship Lower asset retention will continue be challenging to profits,
while at the same time costs to service these assets are rising
Management and Client Service
Rate the impact of the following challenges to profitability to your
The industry concentrates far too much on hunting and sales pitches firm over the next 5 years. U.S. retail intermediary asset mgmt.,
versus focusing on delivering world-class client service and Average score (1-not very impactful, 5-very impactful), top 4
relationship management. Asset managers do this at their own peril as displayed
more than two-thirds of new assets come from existing financial
advisor (FA) relationships and increased penetration of current Lower retention rates 3.60
intermediary firm-level clients.

Firms that make targeted investments into client service and
Increased costs associated 3.45
relationship management will improve asset retention rates—a key
with distribution
driver of profitability. This is a big deal as leaders in the industry
believe that lower retention rates over the coming years will be one of
the top challenges to profitability for their firms. Lower net revenue yields/fees 3.45

Relationship management at both the financial advisor and
intermediary firm levels is key to raising new assets
Minimal net flows 3.35
Source of new assets. U.S. retail intermediary asset mgmt., %
Additional assets from 30 New firm relationships
existing FA relationships 38 and therefore new FAs These investments should also increase overall asset gathering. For
example, Founders Advisory has long been a proponent of
restructuring key accounts to be more of a senior relationship
71% 33 management role. By doing so, asset managers are better positioned to
identify the complex and multi-faceted opportunities that await them
Increased FA penetration from
existing firm relationships from robust global platforms (see page 11) serving both institutions
and individuals.


Firms need to restructure the traditional key accounts role to focus on senior-level
relationship management and dedicate resources to serve due diligence groups

Overview
Buying behaviors are increasing in …leading to new models that forge multiple links and
sophistication… relationships with distribution firms

Asset management firm Distribution firm
Account size

Relationship Home
management office
Institutional

High-end Consultant Due diligence/
PWM relations research

Retail Retail
Field Financial
salesforce advisors
Buyer sophistication



The shift to fee-based advisory programs continues to have a profound impact on
asset managers addressing the U.S. retail intermediary marketplace

Finding Future Flows Despite the negative prognostications in the media,
wirehouses top the list for asset gathering potential
Advisory services have emerged as the primary product delivery
solution for U.S. private wealth management firms. Many of the recent Rate the asset gathering potential for each channel and/or firm
platform development investments have focused on managed account type over the next 5 years. U.S. retail intermediary asset mgmt.,
advisory tools and technology such as transitioning to a unified Average score (1-least potential, 5-greatest potential), top 3
managed accounts (UMA) platform. On this score, for the foreseeable displayed
future the bulk of asset manager gross flows will continue to be sourced
from fee-based managed account programs.
Wirehouses 4.28

Fee-based managed account arrangements have rapidly
become the predominant source of gross flows
Percentage of your gross flows sourced from fee-based managed Independent financial 4.00
advisors (IFAs/RIAs)
account programs (all managed account program types). U.S.
retail intermediary asset mgmt., %
65
56 Independent broker/ 3.83
dealers

27 Additionally, while the vast majority of firm types are adopting
advice delivery via fee-based managed accounts, the channels that
offer the greatest asset gathering potential for asset managers are the
leaders in managed accounts.

5 years ago Today 5 years from today Founders Advisory believes that asset managers need to formally
dedicate more resources to serving due diligence groups (see page
Source: Founders Advisory 15), which are the key influencers within these programs.


Founders Quarterly 4. Appendix

How to Subscribe to Ideas and Insights

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• Title: The U.S. Retail Intermediary Asset
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Founders release date)
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Founders Advisory specializes in the global asset
and wealth management marketplaces

About Methodology

Founders Advisory is a management •Advice and insights that are focused,
consulting advisory firm and actionable, creative, pragmatic, and
provides custom ideas and insights to catalyzing
institutions in the worldwide
financial services industry, serving •Applicable industry experience and
firms focused on asset and wealth know-how
management such as asset managers,
wealth managers, brokerage firms, •Client-driven approach
pension consultants, platform
providers, insurance firms, •Ongoing senior executive dialogue
technology firms, and capital
investors (including venture capital •Senior management focus
and private equity firms).


Our services are based on ongoing client partnerships

Services Description

•Project engagements
Management Consulting •Custom analysis and knowledge development
•Workshops for senior management
•Presentations and roundtable facilitation

•Ongoing problem-solving for key management agenda
Advisory Partners items/issues
•Flexible and fluid partnership
•Dynamic senior management advising and counseling
(i.e., strategic planning, sounding board)
Subscription-
based

•Actionable ideas & insights delivered via:
•Founders Quarterly
Ideas and Insights •Founders Reports


Founders Advisory expertise spans the entire value chain

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

Financial technology Professional buyers
(FINTECH) •State of the industry
•Platform providers •Organizational structure
•Outsourcing •Management Consulting
•Advisory Partners •Buying behaviors
•Portfolio accounting & •Servicing models
management •Ideas and Insights
•Startups

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


Founders management advisory and insights for financial services institutions

Advisory
Paul A. Fullerton
Managing Principal
617.794.6788
paul_fullerton@foundersadvisory.com
P.O. Box 130020 Boston MA 02113

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.


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