Presentation on theme: "Blueprint Project, Phase II"— Presentation transcript:
1 Blueprint Project, Phase II Presented at the LCUC, Niagara-on-the-Lake, OntarioSeptember 19, 2008 Draft
2 Blueprint Phase One: Strategic Priorities Create a Stronger FoundationImproved EconomicsPackaged ProductsEffective DistributionSystematically improve the profitability of the businessMore proprietary productHigher profitability from proprietary productClear mechanisms to share in system economicsDevelop a more focused, packaged offeringMore packaged approach to product and adviceDrive more assets into proprietary productLimit unintended cannibalization of other WM offersDevelop best practices in managing the businessAdvisors work for the credit union, not as a “broker”Develop best practices in sales force managementMore efficient back / middle officeImproved Economics. Improve the profitability of the business through:More proprietary productHigher profitability from proprietary productClear mechanisms to share in system economicsPackaged Products: Develop a more focused packaged offering through:A packaged approach to product and adviceDriving more assets into proprietary productLimit unintended cannibalization of WM offersEffective Distribution through development of best practices in managing the business by:Having advisors work for the credit union, not as the ‘broker’Development of best practices in sales force managementMore efficient back/middle officePosition Credit Unions in Wealth Management SpaceDevelop multi period campaign to position credit unions as competitive, qualified wealth management providers
3 Blueprint Phase One Recommendations Current PositioningGrowth OpportunityBusiness ModelBuild AlignmentCommit to sharing learnings from this project with other wealth management executives to build alignment to this directionAgree 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 unionsFocus 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 yearsConcentrate on achieving growth through advisory channels that are integrated with the branch based retail delivery systems of the credit unionsDo not focus on building standalone delivery models
4 Blueprint Phase Two Scope Build AlignmentIdentify the key requirements from the perspective of participating credit unions (CEOs, WM team) from a packaged fund programImprove EconomicsIdentify options to increase the manufacturing profits that accrue to distributors of the productDesign the offering with efficiency in mindProgram DesignBased on best practices, input from wealth management executives (industry, credit union system) and Blueprint objectives, design an effective packaged fund programBusiness ModelOutline potential business models and highlight key considerations (e.g. governance, costs, effectiveness)Reach agreement on an appropriate path forward
5 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 fundsIn 2006, over 120 fund wraps programs were offered by 40 providers – twice as many as were offered in 2001Fund Wraps Market Share by Asset Size – 2007*Historical Growth of Investment Fund AssetsFund Wraps 22%Stand-Alone Funds 78%Fund WrapsStand-Alone3-year CAGR30%13%Total Investment Fund Market Size in 2007*: $800 Billion* YTD June 2007 Sources: IFIC – 2007 Year in Review. Investor Economics 2007 Fee-based Report
6 Market Logic: Packages are now the largest category in new sales Fund Wraps Market Share by Net Sales – 2007*Historical Growth of Investment Fund SalesStand-Alone Funds** 35%Fund Wraps 65%Stand-AloneFund WrapsYOY Growth90%84%Total Investment Fund Net Sales in 2007*: $31 Billion* YTD June 2007 **Also Includes funds in other managed assets Sources: Investor Economics 2007 Fee-based Report
7 Projected Growth within Investment Funds Market Logic: Packages are expected to growth at roughly twice the rate of stand alone fundsProjected Growth within Investment FundsCAGR:Total: 9.1%14.4%7.2%$1,882B(33%)$789B(21%)(67%)(79%)Source: Investor Economics, 2007 Household Balance Sheet Report
8 Breakdown of Fund Wrap Assets Among the Top-10 Fund Owners - 2008 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 managerAmong Top-10 fund owners, an average 87% of packages have funds provided by captive investment managersBreakdown of Fund Wrap Assets Among the Top-10 Fund Owners$21.3$18.3$16.6$16.4Assets ($ Billions)$9.1$5.9$3.9$2.5$2.0$1.9CIBCRBCIGM FinancialTDFranklin TempletonScotiaAGFDynamic FundsATBManulifeCaptive as a % of Total AUA100%95%84%88%37%64%86%Source: IFIC April 2008 Statistics
9 Program Overview: The Core Structure for the Package Program has been Defined Recommended Core Elements of an Investment Fund Package123456Structure of Package FamiliesUnderlying Investment ManagementMinimum Investment RequiredMER LevelsFee StructureOther Design ElementsRisk/return offeredEfficient portfolio offeredNo lifecycle offering at this stageRoughly 6 asset classes for risk/return and 4 for efficient portfolioApprox. 5 investment advisors in total1-2 with national brands (e.g., Franklin Templeton)Focus on the $10K-$100K asset segmentCapacity to attract >$100K asset segmentsMER range:1.50 for efficient2.35 for risk / returnLow load structureNeed to decide if Fundco finances upfront loadNo fees to client for transfers within programUse 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 rebalancingSource: Deloitte analysis.
10 Overview: Most competitors offer a narrow range of packages Number of Fund Families by Fund AdministratorPackages per Family2-653-85-67-107-96-108637Source: Respective company websites
11 Overview: The most common program is a risk / return structure Fund owners typically feature between 1 and 4 families of packagesThere are three core types of package familiesFund OwnerFamiliesPackagesIncomeBank (e.g., RBC)Branded Asset Manager (e.g., Fidelity)End to End Player (e.g., Investor’s GroupCredit Union (e.g., Credential)ConservativeRisk / ReturnBalancedGrowthLifecycle-basedAggressive GrowthEfficient Investment InstrumentMaturity 2010Maturity 2015Maturity 2020Index funds mixSources: Fund owner websites, Globefund.com
12 12 12 12 Overview of the proposed risk / return package program 3 1 2 6 Risk Profiles Based on Risk Profiles7 Underlying Funds / Portfolio~5 Investment AdvisorsTypical market range: 2-11Typical market range: 3-17Typical market range: 1-8Secure1243513Income6728Conservative109Balanced124511Growth141315Aggressive GrowthExample1617Efficient Package4 Risk Profiles Based on Risk Profiles4 Underlying Funds / Portfolio1 Investment AdvisorTypical market range: 3-5Typical market range: 4Typical market range: 1IncomeCanadian Equity1BalancedCanadian BondGrowthUS EquityAggressive GrowthGlobal EquitySource: Deloitte analysis.121212
13 2The program would leverage a range of investment advisors and other third parties. No specific partners have been selected as of yetInvestment AdvisorsBranded Investment Advisors(Fees: 55 bps – 85 bps – Canadian large cap equity example)Specialist Investment Advisors(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.
14 Portfolios (Risk Profiles) 4Based on current packaged funds on the market, the following MER structure has been assumed for planning purposesPortfolios (Risk Profiles)Suggested MERComparative MERComparative MERSecure1.85%1.42%2.03%Income2.25%1.73%2.28%Conservative2.30%1.95%2.53%Balanced2.40%1.98%2.83%Growth2.50%2.11%2.88%Aggressive Growth2.60%2.21%2.93%Average2.35%1.91%2.70%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 rounded Source: ATB Financial website. TD Canada Trust website. Deloitte Analysis.14141414
15 The market is trending towards no or low load funds 5The business model will most likely provide different load structures, including a deferred sales charge structureTypes of Fees Currently Offered on the MarketNote: 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.151515
16 Independent Investment Consultant 6The program will also include SRI screening, independence, and rebalancingRebalancingSRI ScreensIndependent Investment ConsultantIndependent investment consultant to advise on rebalancingThe team recommends automated rebalancing performed on a quarterly basisThe team does not recommend advisor-driven rebalancingParticipants to determine the extent to which SRI screens should be usedThe 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 proposedFund details and structure to be finalized by an independent investment consultantUse of independent investment consultant limits bias towards specific advisors or participating credit unions161616
18 Future State Economics: The proposed structure would increase manufacturing margins Risk/Return Package, Year 5 (80% of total)Revenue from Investor (MER)235 bpsFund ManagementDistributionRevenue to CUs: ~166 bpsMER ~235 bps-Investment Mgt Fee ~28 bpsFees Received1 ~104 bps=Mgt. Fees ~207 bpsBroker-DealerDistributorDistribution Cost ~104 bpsTotal Rev ~26 bpsTotal Revenue ~78 bpsCustodial Cost ~13 bpsInfrastr. & Legal Cost ~2 bps-Cost ~24 bps-Cost ~58 bpsOperating Margin ~88 bpsOperating Margin ~2 bpsOperating Margin ~20 bps==Pre-tax Operating Margin ~110 bpsNotes: 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.
19 Key Issues: A number of key issues have been raised and addressed DiscussionPotential ResolutionNEI Participation as an Investment ManagerView that NEI should be one of the leading investment managers responsible for investing a significant portion of the overall mandateSelect NEI to manage in the range of 25%+ of the overall portfolioThis percentage is higher than NEI’s current share of managed assets for the system overallPNeed Nationally Recognized ManagersView that a nationally recognized investment manager(s) should be involved in the program, with material mandatesRecommended approach would have a combination of highly recognized managers (e.g. Mackenzie, Templeton) and quality managers known to investment professionals (e.g. Mawer)PProgram Must be Demonstrably IndependentView that the program needs to be demonstrably well designed and unbiased so that advisors will be comfortable advocating for the programRecommended 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 ATBPMER Must be CompetitiveView 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 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 +)P19
20 Key Issues: A number of key issues have been raised and addressed (continued) DiscussionPotential ResolutionNeed Multiple Fund ClassesView 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)PRequire an Appropriate SRI ScreenView that credit unions are in part differentiated on their commitment to socially responsible investingRecommended that a broad SRI screen be applied that would prevent investment in defined sectors (e.g. tobacco)PNeed an Investment Track RecordView that an objective investment track record will be required from the outset to sell the programWill require specific mandates to be selected from funds that are currently in operation vs. establishing a separate fund for this programP20
21 Key Issues: A narrow set of potentially contentious issues have also been largely addressed DiscussionPotential ResolutionAre there Sufficient Volumes to ProceedConcern was raised that there may not be sufficient volumes, particularly if too broad a cross-section of credit unions were required to participateEstimated volumes from the participating credit unions are $1.8Bn. Minimum threshold is likely $1Bn, which would imply meets thresholds at 50% of expectationsPNeed a DSC Structure as well as No / Low LoadSome credit unions strongly prefer a DSC approach and have geared their current economic model around this structure, at least for the near termCan 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 riskPNeed Effective Sales Process SupportThe program would need to have sales support comparable to other well supported programs (e.g. Quotential, AGF, others)Needs discovery questionnaire processPackage recommendationMarketing brochuresIllustrations 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 materialMost likely mirroring competing offersChoices 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 dealerP21
22 Can System Participants Effectively Managed a Shared Program Key Issues: The key issues that remain are affirming commitment to a “short shelf” business model and governanceIssueDiscussionPotential ResolutionAre Credit Unions Committed to Moving to a “Short Shelf” / Proprietary Packaged ModelGeneral acceptance amongst the participants that the investment shelf needs to be materially shortenedGeneral acceptance again of the need to be more directive about selling “recommended” packagesConcern about the pace at which this transition can be made, given the different stage that various credit unions are atThe 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 ProgramConcerns raised that the costs to collaborate may outweigh the benefitsConcerns that in the process of seeking consensus, too many trade-offs will be made thereby eroding the effectiveness of the programConcerns that the governance model may not turn out to be sufficiently enduringWill need to spend sufficient time in establishing an effective governance model from the outset and limit the extent to which this agreement is re-openedCan delegate a larger portion of the on-going management of the program to an independent third party such as Mercer, CIBC Mellon, othersCan 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?22
23 Led by a Few Credit Unions Program Run by System Suppliers The study participants are considering what approach makes the most sense to proceed against, balancing governance complexity and time to market needsIllustrative OptionsStatus QuoBuying GroupLed by a Few Credit UnionsProgram Run by System SuppliersEach credit union makes its own value maximizing decisionEarn a portion of the manufacturing profit through the NEI patronage dividendNegotiate own deals with preferred fund companies for additional support / financial incentivesVarious credit unions leverage their combined volumes to negotiate higher level of support from select, common fund companiesTarget modest near term gain (e.g. 20 to 30 bps) in return for volume commitmentsIncrease bonuses as shared volumes growNegotiate additional supportA few credit unions establish and run the programDetermine role of system providers (NEI, Credential) and degree of dealer exclusivityResponsible to each other for effective governanceEnable other credit unions access to defined programSystem suppliers take the lead in managing a program acceptable to key credit union stakeholdersManage the program in return for specific commitmentsAdopt an appropriate profit sharing modelFund and manage the program, with input from credit union customers
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