paul fullerton mmi 1030 4-21.ppt

Business Challenges for theManaged Accounts Industry

MMI Annual ConventionBoston, MA April 20-21, 2004

Agenda

Program Sponsors

Asset Managers

Vendors

Cerulli Associates Managed Accounts Research

Decade-long pioneering coverage and analysis

Proprietary database tracking key attributes from more than 300 asset managers and sponsor programs

Completion of more than 200 in-depth interviews with senior management annually

Program SponsorsRejuvenated Focus

Attributes Make Managed Accounts a Systematic Investment Service

Advice Delivery: Rejuvenated Focus on Core Attributes

Client ProfilingAdvisors working with clients to develop an understanding of their assets, liabilities, risk tolerance, and financial goals

Asset AllocationViable asset diversification model, and the specific model applied to each client is determined in the profiling process

Ongoing MonitoringAdvisors conduct regular face-to-face client visits, and make portfolio adjustments in adherence to investment plan

Consolidated StatementsStatements detailing account activity, including a client’s relationship with multiple managers and products

Identifiable, Asset-Based FeeThe fee paid by the client must be discrete and identifiable

Source: Cerulli Associates

The Unified Managed Account (UMA) Is the Platform


UNIFIED MANAGED ACCOUNTClient Profiling

Asset AllocationPerformance Reporting

Client Reports

Financial Consultant

Investor

Core Account

RPM

Hedge Funds

Mutual Funds

ETFs

Indiv. Styles

Specific Program Issues and Concerns

• Separate Account Consultant Programs• Fee disclosure (financial advisors and end-clients), directed brokerage

• Mutual Fund Advisory Programs• Pricing an issue with advisory overlay (2.46% total client fee after exp. ratio)

• Rep-as-Portfolio Manager Programs• Mixed bag, portfolio management systems, sponsors increasing monitoring

capabilities

• Fee-based Brokerage Programs• Advisory or nonadvisory; a nondiscretionary advisory feature would allow

firms to combine other advisory programs into a single delivery environment


Multiproduct Delivery in Managed Accounts

Mutual Funds

Separate Accounts

Individual Securities, ETFs

Mutual Funds

Separate Accounts

Individual Securities, ETFs

Mutual FundsAdvisory Program

Contract

Statement

FeesProfi

le

Separate AccountConsultant Program

Contract

Statement

FeesProfi

le

Fee-BasedBrokerage

Contract

Statement

FeesProfi

le

Unified Managed Account

Contract

Statement

FeesProfi

le

Advisor ClientFUTURE MODEL

CURRENT MODEL


BEF

ORE

UM

AU

MA

UMA Ramifications: Come Together

• Business Unit Head• Due Diligence• Operations• Sales & Marketing

• Broker Workstations

• Accounting• Compliance• Web

• Advisor Compensation• Product Pricing

Transparency• Partner Firm Revenue

Sharing


EconomicPolicy

Changes

Operations &TechnologyOrganization

Managed Account Group (MAG)

Managed Account Groups (MAGs) Continue to Grow in Importance, but Challenges Persist

•Operations and Technology•Connecting the plumbing for the UMA; Drive efficiency

•Asset Manager Due Diligence•Integration issues with multiple groups combining (mutual funds and separate accounts); Broaden universe to include alternative investments? •Evolving role of product development; UMA Portfolio Strategist, Overlay portfolio management, MSAs

•Platform Support (Sales, Marketing, Service)•Training, training, training; Harvesting the next generation of managed accounts financial advisors•Delivering a consistent and unified managed accounts message


Platform Support Is Crucial: Spotlight on Sales & Marketing

Product Research and Management

12%

Sales, Marketing,

Service42%

Senior Management

2%Compliance

6%

Other5%

Operations33%

Sponsor Managed Account Group (MAG) Division of Labor


0%

10%

20%

30%

40%

50%

60%

70%

80%

Tier 1 Tier 2 Tier 3

Rep Headcount (est.) Assets Raised (est.)

Tier 1 Advisors Account for Bulk of Historical B/D Managed Account Business

But…New Compensation Structures Poised to Increase Future Contribution of Tier 2 and Tier 3 Advisors

70%+ fee-based 20-70% fee-based < 20% fee-based


0%10%20%30%40%50%60%70%80%90%

100%

Lack of Supportfor Fee-Based

Business

Quality ofHome-Office

Support

Payout Level,Pricing, Costs

Quality of Fee-Based Program

ProprietaryFinancialPlanningServices


Lack of fee-based platform support is the most prevalent reason cited by FAs for leaving their firm

Supporting the Platform Is Key to Advisor Retention

Major Factor Somewhat Important Not an Issue

New Channel: Private Client Groups (PCGs) Defined

Private Banks Private Client Asset Managers

Private Client Brokerages

Private ClientWealth Advisors


• Individual investor focus, but not large B/D

• Proprietary asset mgmt. (y/n)

• Legacy services: banking, brokerage, asset mgmt.

Decision PointsCA’s PCG Segmentation Methodology

PCG Asset Management Delivery Models

Asset Management Architecture

FIRM TYPES• Private Banks• Private Client Asset

Mgrs• Private Client

Brokerages

100% Proprietary Asset Management

FIRM TYPES• Private Banks• Private Client Asset

Mgrs• Private Client

Brokerages

Access to 3rd Party AssetManagement

FIRM TYPES• Private Client Wealth

Advisors

100% 3rd Party Asset Management

Closed Architecture Hybrid Architecture Open Architecture

<< OpenClosed >>

Examples: Northern Trust, Bel Air Inv. Advisors, Garrett Nagle

Examples: Goldman Sachs, Atlantic Trust, BofA, Bingham Legg

Examples: Ashbridge, Tanager, Greycourt, InTrust Advisors


Centralized Platform: MAGs Will Increasingly Be Leveraged Across Global Affiliates

Wirehouse

Managed Account Group Platform

Bank Brokerage

Private Bank

Global

Investment Product PlatformProduct Development

Money Manager Due DiligenceMarketing & Sales Support

Equity Research (In-house & Third-Party)


Asset ManagersConverging Marketplaces

What’s Helping/Hurting/Complicating

Tailwinds Headwinds

Turbulence

• Demographics• Innovation• Strategic Alliances• Globalization

• Tax and Regulation• Capital Markets• Scandal• Innovation• Fee-based Transition

• Complexity• M&A• Outsourcing• Distribution• Globalization

• Competition• Maturation/Saturation• Profit Pressure• Regulation• Risk• Asset Retention• Velocity of Assets

0%5%

10%15%20%25%30%35%40%45%50%

2000 2001 2002 2003

Eaton Vance

Merrill Lynch Global Private Client

Profit Margins Converging

Pretax Profit Margins

Sources: Company Reports, Cerulli Associates

Operationally Inefficient Marketplace

Logon

Logon

Logon

Logon

Portfolio Manager

Model A

Model B

Model D

Program #1

Program #2

Program #3

Program #4

Program #5

Program #6

Program #7

Program #8

OperationsTeam

Model C

INTERFACE


Asset Managers Program Sponsors

Annual Redemption Rate Data for Separate Accounts Is Marginally Better than Mutual Funds

28.9%

24.3%27.8%

20.8%

0%

10%

20%

30%

40%

50%

2002 2003

Equity LTMF Redemption RateSeparate Account Redemption Rate

Sources: ICI, Cerulli Associates

Combined $85 Billion of Net Cash Flows for 2002 & 2003

Manager Decisions in UMA World

•Product•Building and leveraging appropriate product lineup

•Mutual funds, Separate accounts, ETFs, Hedge funds, etc.

•Salesforce•Effective organization and compensation structures

•Multi-product? (dedicated, hybrid, universal), Trails vs. commissions, Geographic vs. channel vs. demographic

•Distribution Relationships•Developing and maintaining profitable relationships

•Number, Asset quality, Marketing and servicing support, Operations and technology


VendorsLeveling the Playing Field

Vendors

Outsource Providers

• Mellon• State Street• BoNY• PFPC• SEI• JP Morgan• Bisys

• Hyland Software• BTA• Imaging

Solutions• LifeHarbor• SoftPak• IAN • Statement One

Workflow / Efficiency

• Citigroup• Parametric• Placemark• Tamarac• Smartleaf• Upstream

Overlay Management

Vertical Platform Providers vs. Specialist Providers?

Portfolio Accounting/Mgt

• Checkfree APL• SunGuard• FMC• IDS• Metavante• Portia• Advent• DST• FIN• Vestmark• Market Street



Service Providers and Managed Accounts

Broker/DealersBroadening of managed accounts

The advent of the Unified Managed Account platform

New face of correspondent clearing

Asset ManagersLowering operational costs (back-office functions, workflow, etc.)

Enabling new products (MSAs, Overlay Management)

Connecting the dots of distribution through platforms

Mutual Fund-Like Industry “Plumbing” for Separate Accounts?

Program #1

Program #2

Program #3

Program #4

Program #5

PMModel A

Model B

OpsTeam

DTCC/ Industry-

wide Solution


PMModel A

Model B

OpsTeam

PMModel A

Model B

OpsTeam

Mgr #1

Mgr #2

Mgr #3

Asset Managers Program Sponsors

Third-Party Vendors: Consolidation to Continue


Target Acquirer Lockwood Bank of New YorkEnvestnet PMCAdvisorPort PFPCLondon Pacific Advisors SunGardCenturion GE Investments

Independent Third-Party VendorsBrinker FundQuestNet Asset Management Oberon FinancialMeridian Investment AssetMark

Enter Stage Left: Clearing Firms Impacting TPV Marketplace

Service Agency

Captive Salesforce

Broker/DealerCorrespondence

Clearing Platform


Centralized Platform: Retail-Focused Clearing Outlets

Platform Spectrum: Unbundling Functions

ExecutionPlatform

TechnologyManagerResearch

PlatformSupport Sponsor

• Advisors• Sales & Mkt• Training

• Due Diligence

• Monitoring• Product

Creation

• Port Acct.• Workstation• Profiling• Billing

• Clearing• Custody• TA

End-to-End Solution


Concluding Thoughts

•The increasing importance of advice in retail distribution is broadening Managed Accounts to new outlets and deepening advisor penetration.

•Fee-based drivers, Platform access, Simplicity, Advice

•The Unified Managed Account (UMA) is the platform that simplifies and integrates.

•Single port of entry, Increased fee-based business, Product neutral

•Asset manager salesforce and operational decisions can drive efficiencies. Managers need to look for organizational leverage points.

•Corporate structure, Product line legacy, UMA implications


Paul A. FullertonAssociate Director617.437.1098 X118 [email protected]

Jack Rabun Senior Analyst617.437.1098 [email protected]

Further Information

Cerulli Associates575 Boylston StreetBoston, MA 02116www.cerulli.com

Appendix

paul fullerton mmi 1030 4-21.ppt

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