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Blueprint Project, Phase II. Presented at the LCUC, Niagara-on-the-Lake, Ontario September 19, 2008 Draft. Blueprint Phase One: Strategic Priorities. Create a Stronger Foundation. Systematically improve the profitability of the business More proprietary product

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Blueprint project phase ii

Blueprint Project, Phase II

Presented at the LCUC, Niagara-on-the-Lake, Ontario

September 19, 2008 Draft

Blueprint phase one strategic priorities
Blueprint Phase One: Strategic Priorities

Create a Stronger Foundation

  • Systematically improve the profitability of the business

    • More proprietary product

    • Higher profitability from proprietary product

    • Clear mechanisms to share in system economics

Improved Economics

Packaged Products

Effective Distribution

  • Develop a more focused, packaged offering

    • More packaged approach to product and advice

    • Drive more assets into proprietary product

    • Limit unintended cannibalization of other WM offers

  • Develop best practices in managing the business

    • Advisors work for the credit union, not as a “broker”

    • Develop best practices in sales force management

    • More efficient back / middle office

Position Credit Unions in Wealth Management Space

  • Develop multi period campaign to position credit unions as competitive, qualified wealth management providers

Blueprint phase one recommendations

Build Alignment

Current Positioning

Growth Opportunity

Business Model

Blueprint Phase One Recommendations

  • Agree that the current positioning of the credit union system in wealth management is untenable as it fails to effectively serve the needs of our members and erodes the longer term competitiveness of credit unions

  • Commit to sharing learnings from this project with other wealth management executives to build alignment to this direction

  • Focus the strategy on achieving significant increases in both assets and profitability. Target a combined 4-5X growth in wealth management profitability, over the next five to seven years

  • Concentrate on achieving growth through advisory channels that are integrated with the branch based retail delivery systems of the credit unions

  • Do not focus on building standalone delivery models

Blueprint phase two scope
Blueprint Phase Two Scope

  • Identify the key requirements from the perspective of participating credit unions (CEOs, WM team) from a packaged fund program

Build Alignment

  • Identify options to increase the manufacturing profits that accrue to distributors of the product

  • Design the offering with efficiency in mind

Improve Economics

Program Design

  • Based on best practices, input from wealth management executives (industry, credit union system) and Blueprint objectives, design an effective packaged fund program

  • Outline potential business models and highlight key considerations (e.g. governance, costs, effectiveness)

  • Reach agreement on an appropriate path forward

Business Model

Market logic wraps package are approximately 25 of the market today
Market Logic: Wraps / package are approximately 25% of the market today

  • Fund wraps assets grew by $23B during the first half of 2007, accounting for 47% of the total asset growth in investment funds

  • In 2006, over 120 fund wraps programs were offered by 40 providers – twice as many as were offered in 2001

Fund Wraps Market Share by Asset Size – 2007*

Historical Growth of Investment Fund Assets

Fund Wraps22%

Stand-Alone Funds78%

Total Investment Fund Market Size in 2007*: $800 Billion

* YTD June 2007Sources: IFIC – 2007 Year in Review. Investor Economics 2007 Fee-based Report

Market logic packages are now the largest category in new sales
Market Logic: Packages are now the largest category in new sales

Fund Wraps Market Share by Net Sales – 2007*

Historical Growth of Investment Fund Sales

Stand-Alone Funds**35%

Fund Wraps65%

Total Investment Fund Net Sales in 2007*: $31 Billion

* YTD June 2007**Also Includes funds in other managed assetsSources: Investor Economics 2007 Fee-based Report

Market logic packages are expected to growth at roughly twice the rate of stand alone funds

CAGR: 2006 - 2016 sales

Total: 9.1%



Market Logic: Packages are expected to growth at roughly twice the rate of stand alone funds

Projected Growth within Investment Funds







Source: Investor Economics, 2007 Household Balance Sheet Report

Market Logic: Most of the packages sold by the leading players are proprietary (program run by the selling firm)

  • For captive funds, the asset manager is the same firm as, or a wholly owned subsidiary of, the fund manager

  • Among Top-10 fund owners, an average 87% of packages have funds provided by captive investment managers

Breakdown of Fund Wrap Assets Among the Top-10 Fund Owners - 2008





Assets ($ Billions)









IGM Financial


Franklin Templeton



Dynamic Funds



Source: IFIC April 2008 Statistics

Program overview the core structure for the package program has been defined
Program Overview: The Core Structure for the Package Program has been Defined

Recommended Core Elements of an Investment Fund Package







Structure of Package Families

Underlying Investment Management

Minimum Investment Required

MER Levels

Fee Structure

Other Design Elements

  • Risk/return offered

  • Efficient portfolio offered

  • No lifecycle offering at this stage

  • Roughly 6 asset classes for risk/return and 4 for efficient portfolio

  • Approx. 5 investment advisors in total

  • 1-2 with national brands (e.g., Franklin Templeton)

  • Focus on the $10K-$100K asset segment

  • Capacity to attract >$100K asset segments

  • MER range:

  • 1.50 for efficient

  • 2.35 for risk / return

  • Low load structure

  • Need to decide if Fundco finances upfront load

  • No fees to client for transfers within program

  • Use of independent investment consultant (e.g., Mercer)

  • Broad, simple SRI screen (e.g., excludes investments in non-compliant sectors)

  • Independent investment consultant to advise on rebalancing

Source: Deloitte analysis.

Overview most competitors offer a narrow range of packages
Overview: Most competitors offer a narrow range of packages

Number of Fund Families by Fund Administrator

Source: Respective company websites

Overview the most common program is a risk return structure
Overview: The most common program is a risk / return structure

  • Fund owners typically feature between 1 and 4 families of packages

  • There are three core types of package families

Fund Owner




  • Bank(e.g., RBC)

  • Branded Asset Manager (e.g., Fidelity)

  • End to End Player(e.g., Investor’s Group

  • Credit Union(e.g., Credential)


Risk / Return




Aggressive Growth

Efficient Investment Instrument

Maturity 2010

Maturity 2015

Maturity 2020

Index funds mix

Sources: Fund owner websites,

Overview of the proposed risk / return package program structure









6 Risk Profiles Based on Risk Profiles

7Underlying Funds / Portfolio

~5Investment Advisors

Typical market range: 2-11

Typical market range: 3-17

Typical market range: 1-8





















Aggressive Growth




Efficient Package

4Risk Profiles Based on Risk Profiles

4Underlying Funds / Portfolio

1Investment Advisor

Typical market range: 3-5

Typical market range: 4

Typical market range: 1

Canadian Equity


Canadian Bond


US Equity


Global Equity

Aggressive Growth

Source: Deloitte analysis.

2 structure

The program would leverage a range of investment advisors and other third parties. No specific partners have been selected as of yet

Branded Investment Advisors

Specialist Investment Advisors

Investment Advisors

(Fees: 55 bps – 85 bps – Canadian large cap equity example)

(Fees: 30bps – 50bps - Canadian large cap equity example)

Fund Custodians

(Fees: $20K/portfolio and $25-$100 client account)

Independent Investment Consultants

(Fees: $20K for manager selections/$15K for portfolio allocation/fund)

Source: Deloitte Analysis.

Based on current packaged funds on the market, structurethe following MER structure has been assumed for planning purposes


Portfolios(Risk Profiles)

Suggested MER

Comparative MER

Comparative MER





















Aggressive Growth








Note: Analysis conducted by taking an average of competitive MER rates; a sample of risk/return packaged fund products offered by competitors including National Bank of Canada, RBC, TD Canada Trust, CI Investments, Dynamic Funds, and ATB was used; figures may be roundedSource: ATB Financial website. TD Canada Trust website. Deloitte Analysis.

The market is trending towards no or low load funds
The market is trending towards no or low load funds structure


  • The business model will most likely provide different load structures, including a deferred sales charge structure

Types of Fees Currently Offered on the Market

Note: Analysis is based on a survey of competitive risk/return packaged fund products from 12 financial service providers, including Fidelity, Manulife Financial, CI Investments, Franklin Templeton, RBC, TD Canada Trust, CIBC, and ATB Financial. Data is approximate and directional in nature.

Source: Deloitte analysis.

The program will also include sri screening independence and rebalancing
The program will also include SRI screening, independence, and rebalancing



SRI Screens

Independent Investment Consultant

  • Independent investment consultant to advise on rebalancing

  • The team recommends automated rebalancing performed on a quarterly basis

  • The team does not recommend advisor-driven rebalancing

  • Participants to determine the extent to which SRI screens should be used

  • The team recommends that a broad SRI screen be applied to filter investments in non-compliant sectors (e.g., tobacco)

  • Third party such as Mercer or CIBC Mellon proposed

  • Fund details and structure to be finalized by an independent investment consultant

  • Use of independent investment consultant limits bias towards specific advisors or participating credit unions

= independence, and rebalancing


Current State Economics: The current model generates low manufacturing margin

Current State

  • MER ~215 bps

  • Mgt. Fee ~185 bps1

  • Fund Expenses ~30 bps


Fund Management

  • Revenue to CUs:~78-108 bps

  • MER ~215 bps


  • Fund Expenses ~30 bps

  • Fees2 ~97 + 6 bps3 = 103


  • Mgt. Fee ~185 bps1



  • Distribution Cost ~97 bps2

  • TotalRev. ~20 + 6 bps1 = 26

  • TotalRevenue ~60-90 bps

  • Other Costs ~70 bps




  • Cost ~24 bps

  • Cost ~50-60 bps

  • Operating Margin ~18 bps

  • Operating Margin ~2 bps

  • Operating Margin ~0-40 bps




  • Pre-Tax Operating Margin ~20 – 60 bps

Note: 1Includes management fees, administration fees and redemption fees. 2Includes trailer fees and 9 Bps of commission amortization. 3Represents “other” CAM revenueSource: Credential, “Industry Margin Analysis”, 2006. Wealth Management Blueprint Project Steering Committee Meeting, January 29th, 2008.

Future state economics the proposed structure would increase manufacturing margins
Future State Economics: The proposed structure would increase manufacturing margins







Future State

Risk/Return Package,Year 5 (80% of total)

  • Revenue from Investor (MER)

235 bps


Fund Management

  • Revenue to CUs:~166 bps

  • MER ~235 bps

  • Investment Mgt Fee ~28 bps

  • Fees Received1 ~104 bps

  • Mgt. Fees ~207 bps



  • Distribution Cost ~104 bps

  • TotalRev. ~26 bps

  • TotalRevenue ~78 bps

  • Custodial Cost ~13 bps

  • Cost ~24 bps

  • Cost ~58 bps

  • Infrastr. & Legal Cost ~2 bps

  • Operating Margin ~88 bps

  • Operating Margin ~2 bps

  • Operating Margin ~20 bps

  • Pre-tax Operating Margin ~110 bps

Notes: 1No patronage or trailer fees received. Data presented applies 5 years after program launch. More details available in the Financial Model Assumptions section of the Appendix. Source: Deloitte Analysis. Interviews with potential suppliers.

Key issues a number of key issues have been raised and addressed
Key Issues: A number of key issues have been raised and addressed



Potential Resolution

NEI Participation as an Investment Manager

  • View that NEI should be one of the leading investment managers responsible for investing a significant portion of the overall mandate

  • Select NEI to manage in the range of 25%+ of the overall portfolio

  • This percentage is higher than NEI’s current share of managed assets for the system overall


Need Nationally Recognized Managers

  • View that a nationally recognized investment manager(s) should be involved in the program, with material mandates

  • Recommended approach would have a combination of highly recognized managers (e.g. Mackenzie, Templeton) and quality managers known to investment professionals (e.g. Mawer)


Program Must be Demonstrably Independent

  • View that the program needs to be demonstrably well designed and unbiased so that advisors will be comfortable advocating for the program

  • Recommended to engage Mercer or CIBC Mellon to act in an independent capacity to assist in the development and oversight of the program, on a fee for service basis akin to support provided to ATB


  • View that the program needs to have an MER that is competitive with other leading programs (e.g. Templeton Quotential about 240 bps)

  • Recommended MER is 2.35. Most of the feedback to date has found this to be a reasonable level but options to exist to have lower MER for higher minimums (e.g. $50K +)

MER Must be Competitive


Key Issues: A number of key issues have been raised and addressed (continued)



Potential Resolution

Need Multiple Fund Classes

  • View that multiple fund classes will be needed to accommodate tax efficient investors (e.g. corporate class) and enable different MER structures (e.g. higher minimums)

  • Ensure that a competitive array of fund classes to accommodate different advisor requirements (e.g. F class, tax class, corporate class)


Require an Appropriate SRI Screen

  • View that credit unions are in part differentiated on their commitment to socially responsible investing

  • Recommended that a broad SRI screen be applied that would prevent investment in defined sectors (e.g. tobacco)


Need an Investment Track Record

  • View that an objective investment track record will be required from the outset to sell the program

  • Will require specific mandates to be selected from funds that are currently in operation vs. establishing a separate fund for this program


Key Issues: A narrow set of potentially contentious issues have also been largely addressed



Potential Resolution

Are there Sufficient Volumes to Proceed

  • Concern was raised that there may not be sufficient volumes, particularly if too broad a cross-section of credit unions were required to participate

  • Estimated volumes from the participating credit unions are $1.8Bn. Minimum threshold is likely $1Bn, which would imply meets thresholds at 50% of expectations


Need a DSC Structure as well as No / Low Load

  • Some credit unions strongly prefer a DSC approach and have geared their current economic model around this structure, at least for the near term

  • Can structure an option where a portion of future profits are “financed” by the proposed structure, with this class bearing the cost of such financing and asset retention risk


Need Effective Sales Process Support

  • The program would need to have sales support comparable to other well supported programs (e.g. Quotential, AGF, others)

    • Needs discovery questionnaire process

    • Package recommendation

    • Marketing brochures

    • Illustrations around potential investment outcomes, etc.

  • Effective sales process tools (e.g. needs discovery, package recommendation), etc. will need to be built along with supporting sales material

  • Most likely mirroring competing offers

  • Choices around the extent to which such support would be sought from a common broker dealer (Credential) and thereby available on a sole source basis through that broker dealer


Key Issues: The key issues that remain are affirming commitment to a “short shelf” business model and governance



Potential Resolution

Are Credit Unions Committed to Moving to a “Short Shelf” / Proprietary Packaged Model

  • General acceptance amongst the participants that the investment shelf needs to be materially shortened

  • General acceptance again of the need to be more directive about selling “recommended” packages

  • Concern about the pace at which this transition can be made, given the different stage that various credit unions are at

  • The participants should consider the extent to which it will be appropriate for a common entity, such as the broker dealer, to provide practice management support / best practices training to aid credit unions who are further behind in this transition


Can System Participants Effectively Managed a Shared Program

  • Concerns raised that the costs to collaborate may outweigh the benefits

  • Concerns that in the process of seeking consensus, too many trade-offs will be made thereby eroding the effectiveness of the program

  • Concerns that the governance model may not turn out to be sufficiently enduring

  • Will need to spend sufficient time in establishing an effective governance model from the outset and limit the extent to which this agreement is re-opened

  • Can delegate a larger portion of the on-going management of the program to an independent third party such as Mercer, CIBC Mellon, others

  • Can delegate the governance of the program to a subset of the most significant volume contributors to the program who will act on the system’s behalf


The study participants are considering what approach makes the most sense to proceed against, balancing governance complexity and time to market needs

Illustrative Options

Status Quo

Buying Group

Led by a Few Credit Unions

Program Run by System Suppliers

  • Each credit union makes its own value maximizing decision

  • Earn a portion of the manufacturing profit through the NEI patronage dividend

  • Negotiate own deals with preferred fund companies for additional support / financial incentives

  • Various credit unions leverage their combined volumes to negotiate higher level of support from select, common fund companies

    • Target modest near term gain (e.g. 20 to 30 bps) in return for volume commitments

    • Increase bonuses as shared volumes grow

    • Negotiate additional support

  • A few credit unions establish and run the program

    • Determine role of system providers (NEI, Credential) and degree of dealer exclusivity

    • Responsible to each other for effective governance

    • Enable other credit unions access to defined program

  • System suppliers take the lead in managing a program acceptable to key credit union stakeholders

    • Manage the program in return for specific commitments

    • Adopt an appropriate profit sharing model

    • Fund and manage the program, with input from credit union customers