Retail RIAs Trend Setters and Distribution Opportunities October 28, 2005
Maturing Market, but Still Leads in Innovation and Presents Opportunities RIAs morph their practices to reinvent themselves, continue to innovate, and start anew Introduction Growth Maturity Mid-1980s Fees Alternative based on fees AUM Financial Life planning Present Client focused Wealth management 2 Source: Cerulli Associates
Agenda State of the Retail RIA Market Sizing and segmentation Prevailing issues Trend Setters Best practices Broker/dealer emulation Distribution Opportunities Clearing and custody providers Asset managers 3
State of the Retail RIA Market Sizing and segmentation
Retail RIA Assets Continue to Grow Growth returns to sustainable levels $2,000 20% $1,500 15% 10% $1,000 5% $500 0% -5% $0 1999 2000 2001 2002 2003 2004-10% Assets ($ billions) Growth rate 5 Sources: Money Market Directories, National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Retail RIA Firms Decline Fewer firms a positive sign not a negative one 20,000 20% 15,000 15% 10,000 10% 5,000 5% 0-5,000 1999 2000 2001 2002 2003 2004 0% -5% Number of firms Growth rate 6 Sources: Money Market Directories, National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Channel Continues to Expand New advisors enter existing practices or are team-based already 40,000 3.0 30,000 2.8 2.6 20,000 2.4 10,000 2.2 0 2001 2002 2003 2004 2.0 Number of advisors Average advisors per firm 7 Sources: Money Market Directories, National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Segmenting the Market: Two Layers Practice type is more telling By Affiliation and Client Type Independent Financial Advisor (IFA) >75% retail clients Independent Broker/Dealer RIA (IBD-RIA) >75% retail clients, dually registered Hybrid 25% - 75% retail clients By Practice Type Money Manager (MM) Manage individually tailored portfolios for clients Investment Planner (IP) Asset management focused, offer a few other services Financial Planner (FP) Holistic financial planners Wealth Manager (WM) Specialists in wealth management/transfer issues 8 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Independent and Retail-Oriented Essential Retail RIA Firms and Assets by Market Segment, 2004 80% 60% 40% 20% 0% Hybrid IBD-RIA IFA Firms Assets 9 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Gravitation to Holistic Planning Retail RIA Firms and Assets by Practice Type, 2004 60% 40% 20% 0% Money managers Investment planners Financial planners Wealth managers Firms Assets 10 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Firm Reduction, Asset Growth, Advisor Increases 13,743 Retail RIA Firms = $1.563 Trillion in Assets IFAs $1.09tn 9,018 firms >75% Retail IBD-RIAs $102.6bn 3,188 firms >75% Retail Hybrids $365.2bn 1,537 firms 25%-75% Retail RETAIL Asset Management MMs $211.9bn 1,647 firms MMs $6.3bn 121 firms MMs $205.7bn 765 firms INSTITUTIONAL IPs $105.1bn 1,928 firms IPs $13.1bn 488 firms IPs $11.2bn 194 firms 11 Focus Advice FPs $124.7bn 2,543 firms WMs $651.3bn 2,900 firms FPs $35.3bn 1,655irms WMs $47.6bn 925 firms FPs $34.1bn 139 firms WMs $114.1bn 439 firms Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
More Granular Analysis Highlights Opportunities Retail RIA Firms by Market Segment and Practice Type, 2004 100% 80% 60% 40% 20% 0% IFA IBD-RIA Hybrid Money manager Financial planner Investment planner Wealth manager 12 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Assets Levels Must Also Be Considered Retail RIA Assets by Market Segment and Practice Type, 2004 100% 80% 60% 40% 20% 0% IFA IBD-RIA Hybrid Money manager Financial planner Investment planner Wealth manager 13 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Consolidation Is Essential for Growth Not counterproductive growth and consolidation shifts the channel Three levels of growth Channel Market segments and practice types Individual practices Two types of consolidation Among retail RIA firms With firms outside of the retail RIA space 14 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Growth Not Driven by New Firm Establishment New Form ADV filings have slowed 100% 80% 19.2% 6.6% 60% 40% 80.8% 93.4% 20% 0% 2003 2004 Preexisting firms New firms 15 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Breakaway Brokers No Longer Primary Feeder New RIAs come from different sources than their predecessors 40% 30% 20% 10% 0% Established RIA Sources New RIA Sources Registered rep at a B/D Professional investment manager Student Attorney Bank/trust Insurance agent Accounting/CPA firm Other 16 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Sources and Manners Different Now Source of advisors dictates their manner of entrance SOURCE MANNER Brand new advisor/student Existing firm Breakaway broker Dual registration Breakaway team Completely independent 17 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Within Channel, Firms Shift Toward IFA Model Retail RIA Firms by Market Segment 75% 9,018 60% 45% 30% 3,188 15% 1,537 0% IFA IBD-RIA Hybrid 2002 2003 2004 18 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Assets Follow Firms Retail RIA Assets by Market Segment ($ billions) 75% $1,092.9 60% 45% 30% $365.0 15% $102.6 0% IFA IBD-RIA Hybrid 2002 2003 2004 19 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Very Few Masters Exist Hybrid status is often temporary Institutional To Hybrid Hybrid RIA Strategically planned Institutional RIA IFA/IBD-RIA To Hybrid IFA or IBD-RIA Opportunistically undertaken Hybrid RIA 20 Sources: The Cerulli Report Retail Registered Investment Advisors in Transition
Wealth Management Is the Place to Be Retail RIA Firms by Practice Type 40% 30% 4,336 4,264 20% 2,533 2,610 10% 0% Money managers Investment planners Financial planners Wealth managers 2002 2003 2004 21 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Assets Move to the Edges Retail RIA Assets by Practice Type ($ billions) 60% $813.1 40% $423.9 20% $194.1 $129.6 0% Money managers Investment planners Financial planners Wealth managers 2002 2003 2004 22 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Affiliates Increase Capability and Capacity Retail RIA Affiliates, 2004 Insurance agent Other investment advisors 16.1% 15.4% Accountant 13.3% Pension consultant Limited partnership sponsors Real estate agent 7.0% 7.0% 6.4% Attorney Investment company Bank 3.1% 4.3% 3.9% Commodity/futures advisor 1.6% 23 Sources: National Regulatory Service, The Cerulli Report Retail Registered Investment Advisors in Transition
Referrals Are the Key to Book Growth Retail RIA Sources of New Clients, 2005 Cold calling 2% Seminars 5% Organizations 5% Ads 2% Other 7% Networking 6% Client referrals 50% Professional referrals 23% 24 Sources: The Cerulli Report Retail Registered Investment Advisors in Transition
Consolidation Picks Up Slightly Some forms are more prevalent than others Among retail RIA firms IFA Broker/money manager Wealth manager Outside retail RIA space Institutional RIAs Aggregators 25 Sources: The Cerulli Report Retail Registered Investment Advisors in Transition
Lay of the Land IFA further entrenched as the model of choice Lack of leverage and margins are forcing hybrids to choose Regulatory environment forcing IBD-RIAs to choose Everyone is moving toward wealth management Financial planning is becoming relatively more mainstream in traditional channels Consolidation occurring at a slightly greater clip Some channel consolidation may be the key to further growth and innovation 26 Source: Cerulli Associates
State of the Retail RIA Market Prevailing issues
The Price of Independence Barriers to entry continue to rise Wirehouse Reps IBD Reps RIAs Business development Training assistants Attracting, training, and retaining employees Finding office space Marketing/branding Managing staff Budgeting, accounting, and paying bills Attracting, training, and retaining employees Finding office space Marketing/branding Managing staff Budgeting, accounting, and paying bills Selecting a clearing firm All compliance functions Back-office work including account maintenance, statement generation, trade order entry 28 Source: Cerulli Associates
Some Unique Issues of Being an RIA Some have always existed, while others are more timely Time and capacity Business matters Compliance Profitability Broker/dealer competition 29 Sources: The Cerulli Report Retail Registered Investment Advisors in Transition
Nonfinancial Activities Drain Capacity RIA Principal Time Allocation, 2005 Client meetings 22.7% Client service 9.7% Research 14.9% Nonfinancial Activities Trading/asset management 12.2% Client acquisition 14.5% Office administration 10.0% Training/education Back-office operations 7.0% 6.7% Financial Activities Other 2.4% 30 Sources: The Cerulli Report Retail Registered Investment Advisors in Transition
Time Management Issues Affect Firms of All Sizes Some inefficiencies cannot be overcome Percentage of Principals Who Spend More than 20% of Time on Nonfinancial Activities by Firm AUM Level 70% 65% 60% 57% 50% 53% 51% 50% 40% < $50m $50m-$100m $100m-$250m $250m-$500m > $500m 31 Source: Cerulli Associates
Small Businesses Plagued by Operational Issues Some RIAs cannot relinquish control Back-office administration and operations Marketing Personnel additions Education and training Service expansion 32 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Direct Time Allocation Is Only the Beginning Actual and Expected Change in Amount of Time Spent on Compliance Issues, 2005 50% 40% 30% 20% 10% 0% Past change Future change Increase substantially Stay the same Increase somewhat Decrease substantially 33 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Competition Among RIAs Top Concerns RIAs Largest Concerns, 2005 Compliance 4.24 Broker/dealer competition 3.86 Expanding personnel/staffing 3.05 Expanding services 2.90 Profitability 2.74 Transitioning out of the business 2.05 1 2 3 4 5 6 7 1 = Not a concern 7 = Major concern 34 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Profitability Needs to Drive Decisions Matching needs and deliverables essential Investor Advice Needs Level Of Affluence Willingness to Pay Profitability Margin What services to offer? Which clients to service? What to charge? RIA 35 Source: Cerulli Associates
Dealing with Growth Constraints Is Easier Said than Done Self-assessment is the key Setting aside time to analyze your business Determining your skill set and comparing it to your current services Be realistic about areas of expansion How much control are you willing to give up? Appropriate staffing is critical Clearly define roles and responsibilities Match employees skills with tasks Give employees ownership of firm functions Be willing to invest to support growth Delegate, delegate, delegate Assigning more responsibilities to staff is the key to growth Select no more than three areas that will be your core focus 36 Source: Cerulli Associates
RIAs Have an Innate Ability to Concentrate Assets Distribution of Retail RIA Firms and Assets, 2004 60% 50% 40% 30% 20% 10% 0% < $25m $25m- $50m $50m- $100m $100m- $250m $250m- $500m $500m- $1bn > $1bn % of firms % of assets 37 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Trend Setters Best practices
Advice Offering Is a Migration RIAs started at the beginning too Money Management Investment Planning Financial Planning Wealth Management Newsletters, stock recommendations Holistic advice services, very client-centric Basic investment advice, more client interaction Complex, holistic planning, assist with more esoteric needs 39 Source: Cerulli Associates
Advice Service Expansion Continues Frequency of Financial Planning Areas Covered, 2005 Investment 5.1 4.1 Retirement 4.0 3.4 Estate 3.0 2.6 Insurance 2.3 2.3 Emp. ret. benefits 2.2 2.0 Trust 1.8 1.7 Mortgage 1.0 1.0 0 1 2 3 4 5 6 7 1 = Never 7 = Always 40 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Advice Migration: Still Evolving RIAs continue to innovate Money Management Investment Planning Financial Planning Wealth Management Life Planning Newsletters, stock recommendations Holistic advice services, very client-centric Anything remotely affecting finances Basic investment advice, more client interaction Complex, holistic planning, assist with more esoteric needs 41 Source: Cerulli Associates
RIAs Lead in Serving Affluent Investors Client Net Worth Breakdown, 2005 $10m-$25m 5% >$25m 2% <$250K 14% $1m-$10m 45% $250K-$1m 34% 42 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Fees Trump Commissions Alternative fee structures and mix-and-match pricing becoming more mainstream Retail RIA Compensation, 2005 Hourly fees 1% Salaries 1% 1% Fees Fees for for financial plans 4% 4% Annual or or retainer fees 6% 6% Asset-based Asset-based fees fees 83% 83% Commissions 5% 5% 43 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Portfolio Construction Was Unique Client profiling and open architecture allowed RIAs to construct portfolios differently Risk Assessment Income Requirements Needs Assessment Portfolio Preservation Asset Allocation Positive Alpha 44 Source: Cerulli Associates
Methods Continue to Shift Portfolio construction becoming even more sophisticated Monte Carlo Simulation Usage Core-Satellite Usage Always 13% Always 16% Never 54% Sometimes 10% Often 23% Never 59% Often 14% Sometimes 11% 45 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
New Portfolio Construction Methods: New Product Mix Retail RIA Assets Allocated to Different Products 50% 40% 30% 20% 10% 0% Mutual funds Ind. secs Separate accounts ETFs Annuities Insurance LPs Hedge funds Futures funds Other 2001 2005 46 Sources: The Cerulli Report The State of the Retail Registered Investment Advisor Market; The Cerulli Report Retail Registered Investment Advisors in Transition; Cerulli Quantitative Update: Intermediary Markets 2005; Cerulli Quantitative Update: Advisor Metrics 2005
Product Usage Potentially Continuing to Shift Different drivers lead to action on some products Talk and action Separate accounts ETFs More talk than action Hedge funds Insurance Annuities 47 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
RIAs Cannot Go It Alone Retail RIA Business Models, 2005 Branch 2% Sole practitioner 7% Team 91% 48 Source: Cerulli Quantitative Update: Advisor Metrics 2005
Simple or Complex It s All About Specializing RIA teams can take many forms Asset Gatherer CPA Asset Manager Charitable giving specialist Attorney Retirement specialist Clients Investment specialist Insurance specialist 49 Source: Cerulli Associates
One-Stop Shopping on RIAs Minds Some RIAs looking to additional services as a means of differentiation and increasing revenues 100% 80% 60% 40% 20% 0% Banking Services Mortgage Personal/ Business Lending Decrease Debt Refinancing P&C Insurance Stay the Same Increase 50 Source: Cerulli Associates Advisor Survey
RIAs Still in the Lead Most advice-centric and financial planning-oriented Other channels are trying to emulate Greatest proliferation of fee-based pricing Migration continues toward alternative fee structures Portfolio construction methods more sophisticated than the average advisor Core-satellite construction and wider array of product usage Wealth management not the end of the innovation Evolution continues toward life planning 51 Source: Cerulli Associates
Trend Setters Traditional broker/dealer emulation
Broker/Dealer Advisors Outnumber RIAs Almost 300,000 advisors practice in the six channels Regional B/D 5% Bank B/D 6% RIA 13% IBD 35% Insurance B/D 17% NFS B/D 24% 53 Sources: Nelson s, Securities Industry Association, Cerulli Quantitative Update: Intermediary Markets 2005, Cerulli Quantitative Update: Advisor Metrics 2005
Change in Objectives Drives Advisor Focus Traditional advisors are shifting their practices THEN NOW Transactions/Trading Advice Commissions Fees Client Acquisition Client Walletshare/Retention 54 Source: Cerulli Associates
Everyone Wants to Be a Financial Planner, but Only 19% Are Actually Practicing Percent of Financial Planners by Channel, 2005E 100% 80% 60% 40% 20% 0% Bank B/D IBD Insurance B/D NFS B/D Regional B/D RIA Advisors actually practicing financial planning Advisors believing they are practicing financial planning 55 Source: Cerulli Associates Advisor Survey
All Channels Chase the Elusive Affluent Investors Average Advisor s Client Base Breakdown by Net Worth 60% 50% 40% 30% 20% 10% 0% < $250K $250K-$1m $1m-$10m $10m-$25m > $25m 2002 2004 56 Source: Cerulli Associates Advisor Survey
Still Commission, but the Momentum Is Toward Fees Advisors Anticipated Change in Usage of Fee-Based Pricing 100% 80% 60% 40% 20% 0% Bank B/D IBD Insurance B/D NFS B/D Regional B/D Stay the Same Decrease Increase 57 Source: Cerulli Associates
Packaged Product Affinity Broker/Dealer Advisor Assets Allocated to Different Products, 2005 50% 40% 30% 20% 10% 0% Mutual funds Ind. secs Separate accounts ETFs Annuities Insurance LPs Hedge funds Futures funds Money markets Other 58 Source: Cerulli Quantitative Update: Advisor Metrics 2005; Cerulli Quantitative Update: Intermediary Markets 2005
Platforms Open Door to Increased Portfolio Sophistication Unified managed account may cause last line of demarcation to fade RPM Mutual Funds Hedge Funds Core Account Futures Funds ETFs Indiv. Styles UNIFIED MANAGED ACCOUNT PLATFORM Client Profiling Performance Reporting Asset Allocation Client Reports Advisor 59 Source: The Cerulli Edge Managed Accounts Edition
Sole Practitioners Still Dominate Broker/Dealers Broker/Dealer Advisor Business Models, 2005 Team 26% Branch 25% Sole practitioner 49% 60 Source: Cerulli Quantitative Update: Advisor Metrics 2005
Specialization a Prerequisite for Teams Broker/Dealer Advisor Specialties, 2005 None 60.7% Asset management 14.8% Ret. income Ret. plans 8.4% 7.0% Insurance Tax planning Estate Wealth/charity Other Money markets Other 3.1% 1.7% 1.1% 0.8% 2.5% 4.5% 1.1% 61 Source: Cerulli Quantitative Update: Advisor Metrics 2005
Assembly Required Different setup for organic vs. coaxed teams HORIZONTAL CONFIGURATION VERTICAL CONFIGURATION Senior Advisor Advisor Advisor Advisor Advisor Junior Advisor Junior Advisor Junior Advisor 62 Source: Cerulli Associates
Differentiation Will Become Increasingly Difficult Convergence of trends across the intermediary market Fee-based pricing Financial planning and wealth management Independence and autonomy Practice types neutralize channel distinctions Consumers find it hard to differentiate Difficult to analyze services and compare advisors 63 Source: Cerulli Associates
Distribution Opportunities Clearing and custody providers
Service Agents Slowly Chip Away Marketshare of Retail RIA Assets by Clearing and Custody Provider 75% 60% 45% 30% 15% 0% Ameritrade Bear Stearns Charles Schwab Fidelity Fiserv Shareholder Services Group TD Waterhouse Trust Company of America All Other Firms 2000 2001 2002 2003 2004 65 Sources: National Regulatory Services, The Cerulli Report Retail Registered Investment Advisors in Transition
Multiple Relationships Are Becoming Commonplace RIAs by Number of Clearing and Custody Relationships, 2005 Five 8% More than five 14% One 32% Four 4% Three 24% Two 18% 66 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Push Out, Not Pull In, Causes RIAs to Jump Factors Influencing RIAs Decision to Leave Previous Service Agent, 2005 90% 75% 60% 45% 30% 15% 0% Management issues Lack of support Pricing or cost Inadequate technology Quality of products Quality of services Location/ geographic move Forced out Major Factor Somewhat of a factor Not a factor 67 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
All About Support Resources Ideally Offered by Service Agents, 2005 35% 30% 25% 20% 15% 10% 5% 0% Value-add support Technology platforms Product platforms Transaction-fee platforms Execution speed Research Most important service Second most important service Third most important service 68 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Service Agents Beefing up Offerings Firms continue to one-up each other to attract new and retain existing assets Separate account platforms Performance reporting software Marketing assistance Transition programs 69 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Service Agent Prognosis Competition in the service agent market is intensifying Using leverage points to attract new RIAs Multiple service agent relationships more mainstream Hold onto what you ve got Casting a wider net Service agents look downmarket Acquisition? 70 Source: Cerulli Associates
Distribution Opportunities Asset managers
The Cycle Begins Again More asset managers eyeing retail RIAs as a distribution opportunity Dual wholesaling levels Supermarket platform Practice level Different configurations emerging Old setup RIAs grouped with IBDs New setup RIAs as a separate channel or grouped with some banks Right type of personnel essential Experienced key account managers Consultative wholesalers 72 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Shifting Sales Models Reactive vs. proactive depending upon level of commitment to channel Sales Manager Service agent Inside desk/ wholesaler Service agent salesforce RIA RIA Principal External wholesaler Analysts RIA Analyst 73 Source: Cerulli Report Retail Registered Investment Advisors in Transition
RIAs Are a Unique Channel More wholesalers does not translate to more sales ESSENTIAL ELEMENTS DEAL BREAKERS Hands off, not hands on Virtual wholesaling One point of contact Quant analytics team Do your homework Do not sell to them Value-add programs as a value add Know the service agent platforms Persistence is key Time IS money 74 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Changing Structures and Methods Some changes in how wholesaling to RIAs is being done Quant analytics teams Dedicated groups Supporting wholesalers in being more consultative More central to asset manager-advisor relationships Value-add Positioned as a bonus, not the core of the offering Focus on practice management Assistance with asset gathering 75 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Asset Manager Outlook Everyone is in Some new firms entering the space Some old firms reappearing Some still steady Demand for consultative wholesalers Don t send in the wrong guy Do your homework One bad experience trumps many good ones 76 Source: Cerulli Associates
Questions & Answers
Final Thoughts: RIA Channel Outlook Capacity constraints still loom large Functionalization of roles and delegation essential Growing competition inhibits differentiation from peers and competitors Future growth of industry and channel Consolidation may be the key to growth True bellwethers and innovators of intermediary and advice delivery trends 78 Source: Cerulli Associates
Final Thoughts: Asset Concentration Is an Industry Best Practice Distribution of Retail RIA Firms and Assets, 2004 60% 50% 40% 30% 20% 10% 0% < $25m $25m- $50m $50m- $100m $100m- $250m $250m- $500m $500m- $1bn > $1bn % of firms % of assets 79 Source: The Cerulli Report Retail Registered Investment Advisors in Transition
Further Information Kirby Horan Senior Analyst (617) 437-1098 x110 khoran@cerulli.com www.cerulli.com 80