MIS 3090: IT for Financial Services

1. MIS 3090:IT for Financial Services The Brokerage Industry These slides are based on a previous presentation given by Chip Roame of Tiburon Strategic Advisors at the MMI Annual Convention (April 20, 2004) November 18, 2014

2. Market Segments Facts & Perceptions by Segment High Net Worth Market Super Affluent Market Mass Market Affluent Market • Definition: <$100,000 of investable assets • Facts: • 80 million households • Still many un-served households • Being abandoned by full-service brokers and even some discount brokers • Need to watch profitability closely so as not to over-serve • Definition: $100,000 to $1,000,000 of investable assets • Facts: • 24 million households • Growing rapidly • Being courted by discount brokers and others • Definition: $1 to $5 million of investable assets • Facts: • 4 million households • Being courted by many full-service brokers, most bank trust departments, and many fee-only advisors • Growing very rapidly • Definition: $5+ million • Facts: • 250,000 households • Mostly locked into long-term relationships • Growing at moderate pace Source: 11/29/01 Senior Consultant Letter (Winks); 11/01 Financial Advisor; Tiburon Research & Analysis

3. Clients’ Changing Needs • Solutions or life events-oriented • Versus returns-oriented • Seek tailored investments to meet goals, not earn returns • Income & protection-orientation • Versus accumulation & appreciation-orientation of their 40s and 50s • Suggests positive outlook for fixed income, fixed income annuities, principal protected products, disability insurance, long-term care insurance, and liability insurance • Sudden money events may change needs further • Tax orientation will increase with more assets • Sales will require forethought • Family office services and elder care to become more important • Life planning to grow as more wealth allows reconsideration of goals • Estate planning focus to increase with age • Suggests positive outlook for trusts, insurance, and charitable giving

4. Wealth Buckets US Consumer Net Worth ($ Trillions) $46.5 $6.8 $9.6 $39.7 $12.4 $7.5 $17.1 Investable Assets Retirement Plan Assets Total Household Assets Total Household Net Worth Personal Assets Other Illiquid Assets Total Household Liabilities Note: Retirement plans include $1.9 trillion of 401k plans; IRAs though of $2.6 trillion are included in the investable assets number Note: For perspective, it is fun to consider that Bill Gates has approximately $40 billion in Microsoft and his total investable assets peaked a little above $100 billion in 1999 Note: Other sources suggest that investable assets total either $14.7 trillion or $18.1 trillion, and total household liabilities are $4.1 trillion Source: 1/22/04 McKinsey Quarterly; 5/22/02 Wachovia Presentation (Spectrem; McKinsey & Co.); 5/9/02 Wachovia Bank Wealth Management Presentation (Blythe); 5/9/02 Spectrem Presentation; 8/14/01 Wall Street Journal; 7/01 Registered Rep (Cerulli); 6/19/00 Investment News; 12/97 Federal Reserve Bank Flow of Funds Accounts and Consumer Finance Survey; 12/97 First Manhattan Consulting Group; 12/97 Sanford Bernstein Research; 12/97 Access Research; 12/97 ACLI; Tiburon Research & Analysis

5. Some clients are wealthier than others Investable Assets by Market Segment Source: Tiburon Research & Analysis

6. Need for Wealth Management Baby Boomer Life Phases & Key Events Peak Earnings & Savings Years Golden Years Early Stage Liquefaction Approximate Ages Key Life Events • 30s-40s • Marriage • Children • Early earnings years • Business ventures • Wealth accumulation • Early divorces • 50s • Late divorces • Peak earnings • Peak savings • Vacation homes • Children's college • Children’s marriage • Aging parents • Grand children • 60s-70s • Retirement • Liquefaction • Rollovers • Stock options • Sales of homes • Wealth transfer (received) • 80s-90s • Long-term care • Disability • Death of spouse • Wealth transfer (sent) • Charitable giving Source: 2/10/04 SEI Email (Smith); 1/7/04 SEI Conversation (Smith); 9/23/03 SEI Presentation (Smith); Tiburon Research & Analysis

7. Preserve Wealth Build Wealth Goals change with age Primary Investment Goal Source: 5/9/02 Spectrem Presentation; Tiburon Research & Analysis

8. Transfers into IRAs Annual IRA Rollovers ($ Billions) Note: One source calculated that $500 billion will roll into IRAs every year staring in 2010 Source: 8/14/01 American Banker; 8/01 Money (Cerulli); 7/13/01 Cerulli Presentation (EBRI; Pensions & Investments); 7/01 Registered Rep (Cerulli); Tiburon Research & Analysis

9. Competition Competitive Playing Field Full-Service Brokers Discount Brokers • Segmenting offers • Moving to fee-based accounts • Adding help & advice • Moving up market Retail Banks • Up-selling banking customers • Rebuilding trust departments Emerging Affluent & Wealth Management Business Independent Advisors • Expanding investment offers • Extending services to wealth management Private Banks & Money Managers Insurance Companies CPA & Law Firms • Entering the business • Relying on fee-account programs • Moving down market • Testing new models • Entering the business • Relying on fee-account programs at the high-end Source: 5/22/02 Wachovia Presentation; Tiburon Research & Analysis

10. Control of Investable Assets Consumer Investable Assets Independent Advisors $2.1 Trillion (12%) Bank Trust Departments $1.0 Trillion (6%) Wirehouse, Regional, & Boutique Brokers$6.2 Trillion (36%) Retail Banks $4.4 Trillion (26%) Discount Brokers $1.4 Trillion (8%) Insurance Companies$0.3 Trillion (2%) Mutual Fund Companies $1.7 Trillion (10%) Note: This chart excludes all double and triple counting; all dollars are only counted once in the customer-facing channel; excludes corporate, pension, and foreign investments and deposits Note: Another source suggested that brokerage firms manage $6.5 trillion and that the five wirehouses have $4.0 trillion in assets Source: 8/13/01 On Wall Street Web Site; 7/13/01 Cerulli Presentation (SIA); 11/6/00 Investment News (Cerulli Associates); 12/97 Securities Industry Yearbook; 12/97 S&P’s Securities Dealers of North America; 7/22/97 American Banker; 6/97 Financial Planning; 6/97 Dow Jones Investment Advisor; 5/12/97 Pensions & Investments; 4/12/97 American Banker; 3/26/97 American Banker; 3/97 Federal Reserve Bulletin; 12/96 ICI Complex Assets; 12/96 ACLI Life Insurance Factbook; 11/95 Best’s Review; 10/95 VitalSigns Database; Tiburon Research & Analysis

11. Fee-Only seems better Annual Net New Assets ($ Billions) Source: 2/5/04 TD Waterhouse Conversation (Petrilli); 2/2/04 Investment News; 12/02 Investment Advisor; Tiburon Research & Analysis

12. Schwab Emerges as a Leader Retail Customer Assets ($ Billions) Source: 8/16/01 US Bancorp Piper Jaffray Email (Bjorklund); 8/14/01 Wall Street Journal; 8/13/01 Investment News; 8/12/01 US Bancorp Piper Jaffray Web Site; 8/01 Business 2.0; 1/18/01 Wall Street Journal; Tiburon Research & Analysis

13. Managers per Account Number of Managers Used Per Client 5 or More Managers 10% 4-5 Managers 15% 1 Manager 40% 2-3 Managers 35% Source: 11/7/03 Legg Mason Advisor Conversation (Rosenfield); 11/7/03 Legg Mason Advisor Conversation (Castle); 11/7/03 Legg Mason Advisor Conversation (Graham); 11/6/03 Legg Mason Advisor Conversation (Barnhill); 11/6/03 Legg Mason Advisor Conversation (Davidov); 11/6/03 Legg Mason Advisor Conversation (Lopez); 11/5/03 Legg Mason Advisor Conversation (Rafalko); 11/5/03 McDonald Advisor Conversation (Battaglia); 11/4/03 McDonald Advisor Conversation (Sikorski); Tiburon Research & Analysis

14. Little customization on offer… Full-Service Broker Clients Who Customize Their Separately Managed Accounts Customize Separately Managed Accounts 18% Don’t Customize Separately Managed Accounts 82% Note: One source indicated that only 15% of separately managed accounts are customized at the time of set-up Note: Another source also noted that only 30% of accounts receive any special year-end tax treatment Note: Another source indicated that proprietary programs sponsors customize 25%-35% of separately managed accounts Source: 11/7/03 Legg Mason Advisor Conversation (Rosenfield); 11/7/03 Legg Mason Advisor Conversation (Castle); 11/7/03 Legg Mason Advisor Conversation (Graham); 11/6/03 Legg Mason Advisor Conversation (Barnhill); 11/6/03 Legg Mason Advisor Conversation (Davidov); 11/6/03 Legg Mason Advisor Conversation (Lopez); 11/5/03 Legg Mason Advisor Conversation (Rafalko); 11/5/03 McDonald Advisor Conversation (Battaglia); 11/4/03 McDonald Advisor Conversation (Sikorski); 6/03 On Wall Street; 7/2/02 Bob Veres Newsletter (Business Week); Tiburon Research & Analysis

15. Detailed Checklist to Consider… Checklist by Segment High Net Worth Market Super Affluent Market Mass Market Affluent Market • Focus on mutual funds, annuities, and bank products • May evolve to include mutual fund wrap accounts and MSPs • Focus on financial planning, individual securities, mutual funds, mutual fund wrap accounts, MSPs, and separately managed accounts • May evolve into real estate products soon • Core & explore strategies using combinations of index funds & separate account managers may win out • Separately managed accounts (of course) • Want institutional products such as alternative asset classes (hedge funds, venture capital, real estate) • May see use of custom core index products • Wealth management becomes more important than investment management • Family office services emerging • Already seeing use of custom core index products • Already accessing institutional products (e.g., 55% own hedge funds) • Further seeking institutionally-oriented long-term investments – e.g. timber (yes, trees!) • Wealth management clearly is key offering and family office services growing in importance Source: Tiburon Research & Analysis

16. Conclusion • Fee-only financial advisors (one of the booming channels) are questioning the SMA model, in favor of low cost funds, including index funds and ETFs as the core & explore model continues to gain steam… • Discount brokers will thrive… Schwab is adding accounts fast and now is back over $1 trillion with an average account size over $100,000… • Banks… some clients still love them… • CPAs and lawyers may have trust positions with the ultra affluent… and could act as trusted advisors

17. For Next Class… • Read • Read Charles Schwab case carefully • Read through the articles listed on the class website