Evolution of the Independent Channel

Transcription

1 Evolution of the Independent Channel Dan Inveen, Principal and Director of Research, FA Insight Matt Lynch, President and CEO, Capital Analysts Incorporated Tim Murphy, President and CEO, Investors Capital Corporation 1

2 Time For Change 2

3 Views Differ Critical Factors That Define Independence Factor Broker-Dealers Advisors Not an Employee Yes Maybe Affiliate Not Parent-Owned Maybe Maybe Ownership of Client CetBase No Yes Equity in Your Affiliated Firm No Yes Control of Branding Maybe Yes Product Choice Maybe Yes Service and Pricing Flexibility No Yes Platform Choice No Yes Integrity No Yes Source: FA Insight 3

4 Marketplace Realties The best advisors are not interested in working for the broker-dealer They are not interested in selling your products They are interested in a strategic partner They have a multitude of potential partners to choose from Vendors, no matter how satisfied their clients, will never garner strong loyalty 4

5 Cause For Concern 60% Destination of Advisors by Select Channels, ting Advisors Perce entage of Depart 50% 40% 30% 20% 10% % WH to WH IBD to IBD WH to IBD IBD to WH WH to RIA IBD to RIA Source: Cerulli Associates,

6 Consumers Vulnerable 6

7 Shrinking Wealth 70 Household Net Worth and Liquid Assets $Trillion ns Q3 Total Net Worth Liquid Assets Source: FA Insight, Federal Reserve, U.S. BLS. 7

8 Shaken Confidence Ponzi Schemes and Securites Fraud Fraud Investigations Ponzi Schemes nt Workload Sha are of Enforceme SEC Enforcement Devoted to Ponzi Schemes 25% 21% 20% 17% 15% 10% 9% 5% 0% Source: FA Insight, Associated Press. 8

9 Failing Trust 39% of HNW investors do not have a high level of trust in their primary advisor 11% have changed advisors since September % of HNW blame big Wall Street firms for market meltdown Source: Northstar Research Partners, Nov

10 Independent Planners Gain Market Appeal Top Choice Advisor for Affluent Investors 35% entage of Affluen nt Investors 30% 25% 20% 15% 10% 27% 18% 30% 20% 22% 22% Perc 5% 0% Source: FA Insight, Spectrem Group. Full-Service Broker Independent Financial Planner 10

11 Advisors Questioning Their Affiliation 11

12 How Much Longer will the IBD Dominate? Dually Registered, 48% 4.8% Percentage of Advisors by Channel, 2008 Bank BD, 5.3% RIA, 6.0% Regional BD, 11.6% Independent BD, 31.9% Wirehouse, 17.7% Insurance BD, 22.7% Source: Cerulli Associates,

13 Front Page News 13

14 Dwindling Share 60% Wirehouse Assets as a Percentage of All Managed Retail, 2008 and 2012 Percenta age of Investe ed Assets 50% 40% 30% 20% 10% 48% 41% 0% (Expected) Source: Cerulli Associates, September

15 Motivations to Move 54% of brokerage advisors says firm s brand does not help client acquisition and retention 50% say client acquisition is harder since upheaval in the financial services industry 59% say becoming an RIA is appealing with 49% giving it consideration Source: Charles Schwab, Oct

16 The Pull of the RIA Model Perceived Benefits of an Independent RIA Firm Greater independence 51% Opportunity for larger annual income Chance for long-term personal financial success 44% 47% Greater control over personal life Provide more personalized ed service to clients Access to broader set of products & services Increased job satisfaction Opportunity to offer better pricing to clients Less pressure to sell specific products or services Ability to deliver customized client communications 34% 34% 34% 33% 31% 31% 31% 0% 10% 20% 30% 40% 50% 60% Percentage of Mentions Source: Charles Schwab, November

17 Dually Registered Advisor Fastest Growing 25% Advisor Growth by Channel, % 20.0% Com mpound Annual Growth 15% 10% 5% 0% Dually Registered 4.7% 1.8% -0.8% -0.9% RIA Bank BD Insurance BD Independent BD -2.6% -2.6% Regional BD Wirehouse -5% Source: Cerulli Associates,

18 Broker-Dealer Challenges 18

19 Profit Margins Decline 3.0% Median Operating Profit Margin 2.8% Margin 2.5% 2.0% 15% 1.5% 1.4% 2.1% 2.2% 2.1% Profit 1.0% 0.5% 0.0% Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 19

20 Failing to Deliver on What Is Valued Most Average Importance Rating by Provider Type* Factor Broker-Dealer Custodian Technology Service quality Compliance Breadth of product offerings Account servicing and reporting Trade processing Payout rate 4.4 N/A General reputation of broker-dealer or custodian Fees charged Asset management services Practice management assistance Education Investment research Marketing support *Based on 1-5 scale with "5" denoting most important Source: 2008 Moss Adams Financial Performance Study of Advisory Firms. 20

21 Aging Advisors Threaten Growth Distribution of Advisors by Age 100% 90% 9% 10% f Advisors Averag ge Percentage of 80% 70% 60% 50% 40% 30% 20% 23% 24% 33% 33% 24% 22% Greater than Less than 35 10% 0% 13% 11% Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 21

22 Few Firms Are Ready for Succession 60% Firms with Documented Succession Plan for Owners by Stage 55% 50% 47% rms Percentage of Fir 40% 30% 20% 20% 35% 10% 0% Operators Cultivators Accelerators Innovators Source: The 2009 FA Insight Study of Advisory Firms: People and Pay. Sponsored by TD AMERITRADE Institutional. 22

23 Wirehouse Talent Pool Limited for Independent Broker-Dealers Departin ng Wirehouse Ad dvisors Wirehouse Advisors Leaving to Other Firms 1,400 1,200 1, Other Broker Type 11% Firm That Wirehouse Advisor Joined, 2009 Institutional 14% Regional 13% Independent BD 14% Wirehouse 48% Source: FA Insight, Discovery Database. 23

24 Capturing the Opportunity 24

25 Who Will Capture the Opportunity? Best Performing Industries In The Coming Decade ( ) Rank Industry Revenue Growth 1 Voice Over Internet Protocol Providers (VoIP) 150% 2 Retirement and Pension Plans 134% 3 Biotechnology 128% 4 ecommerce and Online Auctions 125% 5 Environmental Consulting 120% 6 Video Games 113% 7 Trusts and Estates 106% 8 Search Engines 101% 9 Recycling Facilities 81% 10 Land Development 73% Source: IBISWorld, December

26 Stiff Competition Many vying to be the advisor s key provider and trusted partner RIAs Custodians Fund companies Broker-dealers Winners will demonstrate the best understanding, articulation and delivery of outcomes that advisors value most How independence is defined and positioned will be a key component of the winner s strategy 26

27 Evolution Is Essential As they must, broker-dealers are evolving from commission processing center to strategic partner Is evolution happening quickly enough? Where do advisors look first for ideas and support? Is the independent broker-dealer still relevant? Broker-dealers struggle to differentiate What is the role of the independent broker-dealer and what more should they provide? 27

28 Refine Your Value Offer Advisor value = Outcomes that advisors experience What outcomes must you achieve for your advisors? How can you influence the way advisors think and feel about your broker-dealer? Value is a function of: Your services + Your image + Your relationship with advisors What types of support will you offer and how should it be packaged in order to best deliver value? How can you best enhance the quality of your relationships? How do your advisors and their clients perceive you and your business? 28

29 Give and Take Broaden Independence Greater control of client base Greater equity participation i Greater control of branding Service and pricing flexibility Greater accommodation of fees and own RIA Eliminate conflicts of interest Deepen the Relationship Truly first-class service quality Innovative technology Succession solutions Practice management support 29

30 HighTower Best of Both Worlds? Wirehouse/ Independent Pure RIA/No Model HighTower Bank Broker-Dealer Brokerage Equity? X X Benefits X X 100% of Services Needed X X No Personal Liability for Business X X Supports Brokerage & RIA X X Business Ownership X 100% Open Architecture 100% Autonomy X Succession Planning X X X (Merrill Lynch, (LPL, Raymond Morgan Stanley, James) UBS) (Schwab, Fidelity) Source: HighTower Advisors, corporate Web site. 30

31 Reaping Benefits 31

32 Younger Advisors = Profits Distribution of Advisors by Age 100% 90% 8% 10% Avera age Percentage of Advisors 80% 70% 60% 50% 40% 30% 20% 21% 25% 37% 32% 24% 21% Greater than Less than 35 10% 0% 10% 12% High-Profit Others Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 32

33 Attracting the Next Generation The next generation of advisors places great value on independence Helping people matters more than making a lot of money CFP Board-registered registered educational programs, including 95 undergraduate, 45 graduate and 4 Ph.D. programs, are now offered by 78 universities These graduates seek a fiduciary, client-first orientation and well-defined career paths How many of you have established ties with these schools? 33

34 Fees Are the Future 45% Asset Management/Advisory Fees Percentage of Re evenue 40% 35% 30% 25% 20% 15% 10% 5% 0% 24.3% 17.8% 2.6% 9.5% 3.2% 13.1% 3.9% 9.8% 5.6% All Firms High-Profit Others Other Third-Party or B-D Directed Advisor Directed Accounts Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 34

35 Advisor RIAs Correlate with Profit Revenue and Profit Impact of RIA Approach e of Revenue Fees as a Percentag 40% 35% 30% 25% 20% 15% 10% 5% 5.5% 38% 8.2% 27% 10.0% 0% 8.0% 6.0% 40% 4.0% 2.0% 18% 0.0% -2.0% -1.8% 0% Asset Mgt. and Planning RIA RIA for Planning Only RIA Not Allowed -4.0% Asset Mgt./Advisory Fees Operating Profit Margin Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 35

36 Succeed with Succession Succession solutions enhance advisor retention as well as recruiting Independence facilitates succession by nature of enhancing liquidity and transferability Advisor control of client base and branding Ownership in affiliated firm 36

37 Final Thoughts 37

38 Key Observations Wide gap between broker-dealers and advisors perceptions of independence Advisors and consumers trending toward a broader scope of findependence d Dually registered are fastest-growing advisor type Aging advisors are forcing broker-dealers to think more creatively about recruiting and succession 38

39 Adapt, Evolve and Differentiate Outlook is bright for forward-thinking broker-dealers who are open to change Vendors will be commoditized Strategic partners will prosper Success requires simultaneously Broadening your notion of independence Deepening relationships How firms choose to differentiate, and not firm size, will distinguish market leaders 39

40 Questions/Answers/Discussion /Di i dan@fainsight.com MLynch@capitalanalysts.com tmurphy@investorscapital.com 40

41 Appendix: Supplementary Slides 41

42 Growing Market 300 U.S. Adult Population by Age, Millions of Pe eople Source: FA Insight, U.S. Census Bureau

43 Growing Needs Greater responsibility placed on individuals to provide for their own financial i futures Market fluctuations have dampened investor enthusiasm for going it alone Financial crisis plus retirement wave means millions must rethink retirement transition Result is an extended accumulation period and greater demand for creative and comprehensive planning 43

44 Investment Performance Matters Least Leading Drivers of Advisor Loyalty Number of Services With Advisor 15% Trustworthiness 14% Service Quality 14% Advisor Knowledge 13% Advisor Relationship 13% Investment Performance 11% 0% 5% 10% 15% 20% Source: Phoenix Marketing International, Shifting Drivers of Advisor Loyalty in the Affluent Market, September,

45 Independent Advisors Show Resilience Median Growth Rates, % 20.0% 18.1% 20.5% nual Percentage Change 15.0% 10.0% 5.0% 0.0% -5.0% 13.3% 8.3% 56% 5.6% 5.3% 4.8% Clients AUM Revenue -1.9% * An -10.0% -15.0% -20.0% -17.7% * Based on firms' expectations for growth Source: The 2009 FA Insight Study of Advisory Firms: People and Pay. Sponsored by TD AMERITRADE Institutional. 45

46 Best Firms More Willing to Groom Talent 60% 50% Of Firms Hiring in 2009, Share Targeting Recent College Graduates, Standouts vs. Others 50% 55% Pe ercentage of Firms 40% 30% 20% 10% 25% 38% 33% 20% 11% 27% Standout Firms Other Firms 0% Operators Cultivators Accelerators Innovators Source: The 2009 FA Insight Study of Advisory Firms: People and Pay. Sponsored by TD AMERITRADE Institutional. 46

47 Standouts More Likely to Offer Training 70% 60% 63% Share of Firms with Formal Training Programs, Standouts vs. Others 67% 62% 57% 56% Pe ercentage of Firms 50% 40% 30% 20% 36% 44% 32% Standout Firms Other Firms 10% 0% Operators Cultivators Accelerators Innovators Source: The 2009 FA Insight Study of Advisory Firms: People and Pay. Sponsored by TD AMERITRADE Institutional. 47

48 Trend Toward Teams The number of advisors working in teams is up 60% since % of advisors are in teams compared to 15% two years ago 31% of wirehouse advisors now in teams compared to 18% two years ago Source: Cogent Research,

49 What Needs Attention Gap Between Importance and Satisfaction Rating* Factor Broker-Dealer Custodian Technology Service quality Compliance Breadth of product offerings Account servicing and reporting Trade processing Payout rate 0.5 N/A General reputation of broker-dealer or custodian Fees charged Asset management services Practice management assistance Education Investment research Marketing support *Based on 1-5 scale with "5" denoting most important or satisfied Source: 2008 Moss Adams Financial Performance Study of Advisory Firms. 49

50 Recruiting Expenditures Rise Recruiting Expenditures by Firm Size $1,000 ure ($ thousands s) Expendit $900 $800 $700 $600 $500 $400 $300 $553 $922 $683 $200 $100 $249 $- $- <$17M* $17M-$54M $54M-$100M $100M-$250M >$250M * < $17M had fewer than 3 respondents Firm Size by Annual Revenue Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 50

51 Broker-Dealers Lack Differentiation 40% 35% 30% 25% 20% 15% 10% 5% 0% 51

52 Ingredients of a BD Value Proposition Firm brand degree of credibility extended to the advisor di Capabilities platform, products and service Clients type type that firm specializes in servicing Compensation payout plus incentive compensation Business value extent extent to which advisor can build and cash out equity Ego gratification the firm s ability to contribute toward an advisor s perception of success Source: Race for Top Talent. Prepared by Moss Adams for Pershing LLC,

53 High Profits Look Elsewhere for Recruits 100% Expected Sources of New Advisors 90% Percentage of New Advisors Average 80% 70% 60% 50% 40% 30% 20% 10% 0% 58% 11% 5% 26% High-Profit 71% 12% 6% 11% Others Other Broker-Dealers Wirehouses Banks Other Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 53

54 Trending Toward Fees 100% 90% 80% 18.6% Average Revenue by Source 26.9% rcentage of Reve enue Pe 70% 60% 50% 40% 30% 20% 10% 31.1% 1% 15.4% 95% 9.5% 18.5% 19.8% 9.7% 7.5% 30.7% Mutual Fund Commissions i Insurance Commissions Trail Commissions Other Commissions Asset Management/Advisory Revenue Not Paid Out 0% 6.8% 5.1% Source: Financial Services Institute 2009 Broker-Dealer Financial Performance Study. Prepared by FA Insight. 54