TIBURON RELEASES UPDATED RESEARCH REPORT ON TRENDS IN SUCCESSION PLANNING, FIRM VALUATIONS, & THE ACQUISITION MARKET FOR FINANCIAL ADVISORS

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1 --- FOR IMMEDIATE RELEASE --- TIBURON RELEASES UPDATED RESEARCH REPORT ON TRENDS IN SUCCESSION PLANNING, FIRM VALUATIONS, & THE ACQUISITION MARKET FOR FINANCIAL ADVISORS -- Report summarizes the emergence of succession planning issue in the fee-only financial advisor and independent rep markets -- TIBURON, CA, June 1, Tiburon Strategic Advisors, a research-based strategic consulting firm, recently released an updated version of its research report on Trends in Succession Planning, Firm Valuations, & the Acquisition Market for Financial Advisors. In this report, Tiburon details transactions that have taken place and offers analysis on how and why certain mergers and acquisitions succeed, while others are doomed to fail from the start. The report includes a comprehensive overview of the different types of buyers and their respective levels of success. Despite finding a small number of past transactions, Tiburon does expect the acquisitions pace to pick up. The firm predicts that upwards of 500 transactions will take place over the next five years. Tiburon Managing Principal Chip Roame attributes this expected growth to three factors: First, more advisors are reaching retirement age. Second, institutional players such as banks and CPA firms are attempting to diversify their revenue streams and find the recurring fee-based nature of these revenues to be quite attractive. And third, a variety of consultants and online supermarkets have emerged to support transactions. The Independent Advisor Markets One of the most dramatic trends over the last several years has been the explosion in the number of independent financial advisors, both fee-only financial advisors and independent reps. Fee-Only Financial Advisors The primary segment addressed by this report is fee-only financial advisors. These advisory firms often place client assets in no-load mutual funds, rebalance accounts periodically, send out quarterly reports, and charge about 1% per year. The number of fee-only financial advisors has been steadily increasing for a decade; there are about 19,500 firms now, six times as many as there were twenty years ago. The 19,500 number today counts firms (as that is how an RIA is registered); from other Tiburon research, we know that the average firm has 1.7 partners, suggesting that there are about 35,000 partners or producers at fee-only financial advisory firms (this number helps us in comparing to the number of registered reps where the individual is registered). The Fee-Only Financial Advisor Market Needs to be Well Understood Though to Identify the Best Opportunities 5,000 Non-Fee Advisors w/aum Mutual Fund Companies 350 Source: 1/99 Tiburon Financial Advisor Interviews; Tiburon Research & Analysis RIA Market Segmentation Separate Account Managers ,000 Total RIAs 20,000 Fee-Based Advisors Investment Managers 9,750 $1,465 billion AUM Financial Advisors 9,750 $488 billion AUM Tiburon Strategic Advisors, LLC The assets of fee-only financial advisors have increased substantially over the last decade, riding the wave of the movement to fee-based investing. While in 1992, fee-only advisors only managed $350 billion in assets, this number has increased to over $2.2 trillion as of the end of However, the fee-only financial advisor market needs to be well understood to identify the best opportunities. The market is a very large, complicated, and often misunderstood segment of the financial services industry. Specifically, the RIA segment includes 26,000 firms in total, but many RIAs are not really fee-only financial advisors as we think of them; this includes 5,000 RIAs with no assets, 350 mutual fund companies and 650

2 separate account managers. All of these firms are RIAs but not really fee-only financial advisors. For the purposes of narrowing our focus, we will be primarily considering the 19,500 fee-only and fee-based financial advisors. There are 9,750 investment managers who collectively manage $1.5 billion in AUM utilizing stocks and bonds. There are also about 9,750 financial advisors who collectively manage $488 billion in AUM utilizing mutual funds and separate accounts. To get a better understanding of the characteristics of this market segment, we will explain some of the basics of how a fee-only financial advisor s business functions through the use of data from Tiburon s business benchmarking study of fee-only financial advisors: No-load mutual funds in fee accounts are the most popular product used by fee-only advisors. 56% of their client assets are invested into no-load mutual funds in fee accounts, 18% are invested in individual securities in fee accounts, 5% are invested in load mutual funds, and the remaining 21% of client assets are invested in other investment products. This implies that at least three-quarters of the assets are placed in fee accounts. Schwab, Fidelity, TD Waterhouse, and First Trust are the leading custodians. In our survey, we found that about half (49%) of fee-only advisors use Schwab Institutional to custody their assets, a quarter (26%) use Fidelity, 21% use TD Waterhouse, and 14% use First Trust/Datalynx. Utilization at other custodians is under 10%. The largest fees are not surprisingly, charged to the smallest clients. Feeonly financial advisors charge their clients between 1.50% and 0.80% per annum for a fee account. The average fee decreases as the accounts become larger. Important to the issue of succession planning, the average fee-only advisor has been in business 10.5 years, with the largest having been in Schwab, Fidelity, TD Waterhouse, and First Trust are the Leading Custodians Schw ab Institutional Fidelity TD W aterhouse First Trust/Da talynx Resources Trust Pershing (Direct) SEI Trust Company of America Source: 2/01 Fee-Only Financial Advisor Best Practices Survey; Tiburon Research & Analysis The Average Fee-Only Financial Advisor Has Been in Business 10.5 Years, with the Largest Having Been in Business the Longest, but Longevity Not Entirely Driving Size Average Years in Business/ Assets Under Management Range 12.5 Source: 2/01 Fee-Only Financial Advisor Best Practices Survey; Tiburon Research & Analysis $0-$24.9 $25-$49.9 $50-$99.9 $100-$199.9 $200+ Assets Under Management ($ Millions) We ve Also Seen an Explosion in the Number of Independent Broker/Dealer Reps SunAmerica Securities Washington Square IBDs Ranked by Number of Reps American Express HD Vest LPL Raymond James FNIC Royal Alliance InterSecurities Walnut Street Prime Vest 1717 Locus Street FFP FSC Securian MSC Custodians Used Across All Fee-Only Financial Advisors 5% 4% 4% 6% 14% 3,596 3,439 3,150 2,525 2,500 2,235 2,215 2,095 1,737 1,636 1,583 1,556 1,556 1,500 1,400 21% 26% Source: 1/7/02 Investment News (FPA; SIA): 12/8/99 Centurion Capital Management (Doede); 9/98 Freemark Meeting (Bergman); 1/98 Financial Planning; 1/96 Financial Planning; Tiburon Research & Analysis 6,224 11,293 49% 2

3 business the longest. When we segmented fee-only advisors across ranges of assets they manage, we found that the smallest advisors have been in the business for eight years, while the largest advisors have been in business for almost 18 years. In any case, the 10.5 year average will be important as we attempt to address when fee-only advisors are likely to retire. Independent Broker/Dealer Reps We ve also seen an explosion in the number of independent broker/dealer reps. Independent reps generally are securities licensed individuals doing some commission business and possibly some fee business. American Express is the largest broker/dealer supporting independent reps with more than 11,000 reps. HD Vest is second with over 6,000 reps; LPL is third with more than 3,500 reps, Raymond James has about 3,400 reps, and FNIC supports 3,150. We will rely on another Tiburon benchmarking study to familiarize the reader with this segment of independent advisors: Up-front product commissions contribute a little over 50% of the average independent rep s revenues, while trailers and investment advisory fees account for an additional 20% each. Unlike the fee-only advisors, independent reps are predominantly commission-based, deriving 53% of their revenues from commission product sales and only receiving 18% of their revenues from investment advisory fees. Across all reps, mutual funds and variable annuities account for the majority of investment product usage, with almost 60% of the total. Specifically, 40% of an average independent rep s assets are held in mutual funds, 19% are held in variable annuities, 11% in individual securities, and only 10% are held in investment advisory accounts. This last number is quite different than the 74% of fee-only advisors. Although the largest reps do have slightly longer tenures, like fee-only advisors, tenure does not appear to be a key determinant of size. We segmented this group of independent advisors into revenue ranges and found that even the smallest reps, those with $0-$299,999 in revenues, have been a rep for 14 years, while the largest reps, those with over $1 million in revenues, have only been in business for five years longer or 19 years. Again, these long tenures point to the lurking retirement issue. Although the Largest Reps Do Have Slightly Longer Tenures, Tenure Does Not Appear to be a Key Determinant of Size 14 Years as a Rep by Rep Firm Size 18 $0 - $299,999 $300,000 - $599, $600,000 - $999,999 Total Firm Revenues Source: 2/02 Independent Rep Best Practices Survey; Tiburon Research & Analysis 19 $ 1 M illio n + Forty Percent of Reps Plan to Retire in the Next Fifteen Years Furthermore, forty percent of independent reps plan to retire in the next fifteen years. This is our first concrete evidence that independent advisors will need some succession planning assistance. We also know that unfortunately, others will die or become disabled, leading to even larger numbers. The Succession Planning Issue As a result, the inevitable issue of succession planning has been brought to the forefront. Retirement Plans Across All Reps Don't Plan to Ever Retire 22% Greater than 15 Years 39% 5 Years or Less 6% 6-15 Years 33% Source: 2/02 Independent Rep Best Practices Survey; Tiburon Research & Analysis 3 Tiburon Strategic Advisors, LLC

4 Many financial advisors began their businesses in the 1980s, when the industry was in its infancy, and are now looking toward their retirement years. The succession planning issue has become one of the hottest topics at financial advisor conferences. Retirement Plans One study showed that 30% of financial advisors are going to retire in the next five years. Furthermore, this number will only increase as additional advisors will likely retire due to poor health. Another study we found, argued that 30% of financial advisors were looking to retire by 2005, which moves the timetable up even more. In any case, this provides an opportunity for advisors looking to buy businesses. It also suggests a need for these advisors to really carefully start thinking about succession planning. To get a better handle on retirement plans, we conducted telephone interviews with some independent advisors. We asked independent advisors a variety of questions regarding retirement and succession planning. The first question that we asked was regarding these advisors retirement plans. Like in our benchmarking study discussed earlier, we again found that a majority of advisors are planning on retiring in the next 15 years. Specifically we found from our survey sample that over 50%, or 9 out of 16, were planning on retiring in the next fifteen years. Furthermore, almost three quarters of advisors expect to turn over control of their practice to a next generation of advisors. One study we found stated that 70% expect to turn over control of their practice to the next generation of advisors (which implies that advisors want to see their business live on). The question is whether the advisors looking to retire are really ready for that. Have they done any planning? Succession Plans Advisors who are planning for succession have a variety of plans; most are looking inward. A small number, just 13%, of all advisors say that they plan to sell to an outside firm as their succession plan. As an aside, 21% of the advisors with AUM in excess of $100 million said that they would sell to an outside firm. 63% of all advisors, and three-quarters of advisors with over $100 million AUM, said that they planned to sell to other principals or employees. The remaining advisors in each category plan to refer their business out to another advisor or close their business. As an aside, another study said that 47% of sales are expected to go to employees, 20% to existing partners (for a total of 67%), 17% to outside firms, and 15% of businesses would go by the process of Advisors Who Are Planning For Succession Have a Variety of Plans; Most are Looking Inward Refer business to another advisor or close Sell to other principals or employees Sell to outside firm 24% 63% 13% All Advisors Succession Plans Note: Another study said that 47% of sales are to employees, 20% to existing partners (for a total of (67%), 17% to outside firms, and 15% were referrals or business closures Source: 9/15/00 Moss Adams Presentation (Tibergien); 8/2/99 IAG Conversation (Kelly); 7/99 Registered Representative; 5/99 Financial Advisor Practice; 3/22/99 Investment News; 2/22/99 Investment News; 10/12/98 Investment News; 7/98 Financial Advisory Practice; 5/97 Investment Counseling Weathervane; 1/97 Schwab Advisor Practices Benchmarking Study; Tiburon Research & Analysis 4% 75% 21% Advisors > $100 M illion AU M referrals or business closures. It seems that selling to an existing partner or employee is the most popular choice for selling a business. We followed this up with a telephone survey and found that (slightly differently) most advisors are planning to sell to another local advisor, though quite a few are grooming someone internally to take over the business as well. Almost half (8 out of 17) of advisors told us that selling to another local advisor was their planned method of succession. Sale to a current employee/principal was the second most common answer with 6 out of 17 responses. So it seems that selling locally or to someone who works for the firm is the most logical direction to go for most advisors. Most advisors we interviewed think that other advisors and employees/partners will be the most successful buyers. When we asked these advisors to rate on a scale of 1-10 the expected success of financial buyers, strategic buyers, other advisors, and employees/partners, they rated other advisors the highest with a 7.3 4

5 and employees/partners second with a 7.2. Strategic buyers and financial buyers each received substantially lower scores, 5.6 and 4.5 respectively. Advisors comments included: I think selling to a local advisor or to an internal employee are the two best possibilities for success; it will create the best retention rates and the smoothest transition It seems that small local advisors would be a much better candidate to buy my business as opposed to a financial or strategic buyer who would be too arrogant I think the internal employees will be the most successful buyers since they already have the relationships established with the clients Level of Preparation So the question is how prepared are these advisors to sell their practices? The short answer is not very! A relatively small minority has a written succession plan, very few have had a professional valuation completed, and the advisors interviewed admitted that they have only done a moderate job of succession planning. All this means is that there is obviously a need for assistance in this area across segments of independent advisors. Only 30% of fee-only advisors have a succession plan. Again utilizing our benchmarking study, we know that only 20% of fee-only advisors in the smallest asset category have a succession plan and just 40% of even the largest fee-only advisors have a succession plan. Likewise only 25% of independent reps report having a written succession plan. As you will recall, we have pointed out that about 40% of reps in this segment plan to retire in the next fifteen years. If that is the case, substantially more should have succession plans. Specifically, only 8% of reps in the smallest revenue range have a succession plan and again 31% of even the largest reps do. Of the advisors we interviewed, only a third reported having a written succession plan. When we asked advisors over the phone if they had a succession plan, only five out of 17 responded that hey had a written plan. Again, further supporting the point that independent advisors are not prepared for succession. Only 30% of Fee-Only Advisors Have a Written Succession Plan Existence of Written Succession Plans/ Assets Under Management Range 20% 20% 30% 40% 40% $0-$24.9 $25-$49.9 $50-$99.9 $100-$199.9 $200+ Assets Under Management ($ Millions) Note: Others say this number is even lower Note: Another source reported that 50% of advisors claimed to have succession plans in place Note: Another source said that more than two-thirds are operating without an ownership plan and at least half lack a succession plan Source: 12/24/01 Fund Marketing Alert; 12/01 Investment Advisor; 2/01 Fee-Only Advisor Best Practices Survey; 4/99 Ticker (Downer & Company); Tiburon Research & Analysis Only 25% of Independent Reps Have a Written Succession Plan Existence of Succession Plans by Rep Firm Size (Percent) 29% 31% Less than one-quarter of advisors believe they know the value of their businesses. One industry study asked advisors if they knew the value of their business and only 22% claimed to know the answer. 8% 24% None of the advisors we spoke to have had a $0 - $299,999 $300,000 - $599,999 $600,000 - $999,999 $1 M illio n + third-party valuation performed on their Rep Firm Size practice. Of the 17 advisors we interviewed for this study, not even one had a third-party Source: 2/02 Independent Rep Best Practices Survey; Tiburon Research & Analysis valuation done on their practice. Again, this seems to be further evidence that independent advisors are not prepared for succession, since having a valuation done on your firm seems to be a crucial step to succession planning. 5

6 Advisors think that they have done only an adequate job of succession planning. Based on the evidence, this is clearly true! When we asked advisors how they rate their own succession planning on a scale of 1-10, we found that the average was only a 5.8. That is a very low score in a survey of this type. Advisors replied with the following comments: I ve talked to two local advisors who would buy my clients if something happened to me; I don t have anything written out yet I don t think I m prepared at all; I ve thought about it and have talked to some people but I certainly don t have a plan yet I haven t planned at all; I ve been so busy just working I haven t put much thought into succession planning A Crisis or Opportunity for Custodians and Independent Broker/Dealers? Advisor succession planning is an important issue for the custodians and independent broker/dealers. Through our telephone interviews, we determined that almost half of all independent advisors are over age 50 and that these advisors over age 50 control over half of all the industry s production. If the custodians and independent broker/dealers do not act, they could have a serious attrition problem! Custodians and independent broker/dealers should analyze this data internally to assess their vulnerability. To the degree that older advisors control substantial assets, one important consideration will become how to transition these advisors businesses to remain within the institution as opposed to risking the advisor selling their business to another institution. Almost Half of All Independent Advisors are Over 50, Suggesting a Pending Retirement Movement Percent of Advisors by Age (Percent) Note: We may want to further cut this data at age 60 Source: 3/5/02 FP Transitions Conversation (Goad): 3/1/02 HD Vest Conversation (Ochs); 2/6/02 HD Vest Conversation (Klein); 1/27/02 HD Vest (Klein); Tiburon Research & Analysis Tiburon Strategic Advisors, LLC On the other hand, what surprises us at Tiburon is how most custodians and independent broker/dealers see this only as a defensive issue. Why not help the 50% of advisors who are nowhere near retirement age to buy the practices of others? This could even become a new growth strategy for custodians and independent broker/dealers! Good luck! Age >50 48% Age % Age % Tiburon Strategic Advisors Tiburon Strategic Advisors, based in Tiburon, CA, was formed in 1998 to offer research-based strategic consulting and other related services to financial institutions and investment managers. The firm has served over 150 corporate clients and completed over 350 research and strategic planning projects in that period. The firm s knowledge base ranges from mutual fund distribution, to wrap programs, alternative investments, online financial services, the fee-only financial advisor market, and bank/broker mergers. CONTACT: Krista Jenssen at Tiburon Strategic Advisors at KJenssen@TiburonAdvisors.com or (415) If you are still receiving Tiburon releases by regular mail, please drop us a line with your address and we will get these out to you 5-7 days earlier and more conveniently. 6