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Blueprint Project, Phase II Presented at the LCUC, Niagara-on-the-Lake, Ontario September 19, 2008 Draft.

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Presentation on theme: "Blueprint Project, Phase II Presented at the LCUC, Niagara-on-the-Lake, Ontario September 19, 2008 Draft."— Presentation transcript:

1 Blueprint Project, Phase II Presented at the LCUC, Niagara-on-the-Lake, Ontario September 19, 2008 Draft

2 - 2 - Confidential Draft for Discussion Purposes Only 2 Blueprint Phase One: Strategic Priorities Improved EconomicsPackaged ProductsEffective Distribution 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 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

3 - 3 - Confidential Draft for Discussion Purposes Only 3 Blueprint Phase One Recommendations Current Positioning Growth Opportunity Business Model Build Alignment » Commit to sharing learnings from this project with other wealth management executives to build alignment to this direction » 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 » 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

4 - 4 - Confidential Draft for Discussion Purposes Only 4 Blueprint Phase Two Scope Improve Economics Program Design Business Model Build Alignment » Identify the key requirements from the perspective of participating credit unions (CEOs, WM team) from a packaged fund program » Identify options to increase the manufacturing profits that accrue to distributors of the product » Design the offering with efficiency in mind » 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

5 - 5 - Confidential Draft for Discussion Purposes Only 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 * YTD June 2007 Sources: IFIC – 2007 Year in Review. Investor Economics 2007 Fee-based Report Fund Wraps Market Share by Asset Size – 2007*Historical Growth of Investment Fund Assets Total Investment Fund Market Size in 2007*: $800 Billion Stand-Alone Funds 78% Fund Wraps 22% Fund WrapsStand-Alone 3-year CAGR30%13%

6 - 6 - Confidential Draft for Discussion Purposes Only 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 Total Investment Fund Net Sales in 2007*: $31 Billion Stand-Alone Funds** 35% Fund Wraps 65% * YTD June 2007 **Also Includes funds in other managed assets Sources: Investor Economics 2007 Fee-based Report Stand-AloneFund Wraps YOY Growth90%84%

7 - 7 - Confidential Draft for Discussion Purposes Only Market Logic: Packages are expected to growth at roughly twice the rate of stand alone funds Source: Investor Economics, 2007 Household Balance Sheet Report Projected Growth within Investment Funds $789B (33%) (67%) $1,882B (79%) (21%) CAGR: Total: 9.1% 14.4% 7.2%

8 - 8 - Confidential Draft for Discussion Purposes Only Market Logic: Most of the packages sold by the leading players are proprietary (program run by the selling firm) Source: IFIC April 2008 Statistics Captive as a % of Total AUA 100%95%84%88%100%37%100%64%100%86% Breakdown of Fund Wrap Assets Among the Top-10 Fund Owners $21.3 RBC $18.3 TD $16.6 IGM Financial $16.4 Franklin Templeton $9.1 Scotia $5.9 Dynamic Funds $3.9 ATB Assets ($ Billions) $2.5 $2.0 $1.9 CIBC AGF Manulife 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

9 - 9 - Confidential Draft for Discussion Purposes Only Program Overview: The Core Structure for the Package Program has been Defined Source: Deloitte analysis. 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) 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 Structure of Package Families Underlying Investment Management MER Levels Fee Structure Other Design Elements Recommended Core Elements of an Investment Fund Package Focus on the $10K-$100K asset segment Capacity to attract >$100K asset segments Minimum Investment Required

10 Confidential Draft for Discussion Purposes Only Overview: Most competitors offer a narrow range of packages Source: Respective company websites Number of Fund Families by Fund Administrator Packages per Family

11 Confidential Draft for Discussion Purposes Only Overview: The most common program is a risk / return structure Sources: Fund owner websites, Conservative Balanced Growth Aggressive Growth Maturity 2010 Maturity 2015 Maturity 2020 Index funds mix PackagesFamiliesFund Owner Fund owners typically feature between 1 and 4 families of packages There are three core types of package families Risk / Return Lifecycle-based Efficient Investment Instrument Income Bank (e.g., RBC) Branded Asset Manager (e.g., Fidelity) End to End Player (e.g., Investors Group Credit Union (e.g., Credential)

12 Confidential Draft for Discussion Purposes Only 4 Risk Profiles Based on Risk Profiles Overview of the proposed risk / return package program Secure Income Conservative Balanced Growth Aggressive Growth 6 Risk Profiles Based on Risk Profiles 7 Underlying Funds / Portfolio ~5 Investment Advisors Typical market range: 2-11Typical market range: 3-17Typical market range: 1-8 Example Source: Deloitte analysis Income Balanced Growth Aggressive Growth 4 Underlying Funds / Portfolio 1 Investment Advisor Typical market range: 3-5Typical market range: 4Typical market range: 1 Canadian Equity Canadian Bond US Equity Global Equity 1 Efficient Package Risk/ Return Package

13 Confidential Draft for Discussion Purposes Only Fund Custodians Investment Advisors Independent Investment Consultants (Fees: 55 bps – 85 bps – Canadian large cap equity example) Source: Deloitte Analysis. 2 The program would leverage a range of investment advisors and other third parties. No specific partners have been selected as of yet (Fees: $20K/portfolio and $25-$100 client account) Branded Investment Advisors Specialist Investment Advisors (Fees: 30bps – 50bps - Canadian large cap equity example) (Fees: $20K for manager selections/$15K for portfolio allocation/fund)

14 Confidential Draft for Discussion Purposes Only Comparative MER Based on current packaged funds on the market, the following MER structure has been assumed for planning purposes 4 Secure Income Conservative Balanced Growth Aggressive Growth Portfolios (Risk Profiles) Suggested MER 1.85%1.42% 2.25%1.73% 2.30%1.95% 2.40%1.98% 2.50%2.11% 2.60%2.21% 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. Comparative MER 2.03% 2.28% 2.53% 2.83% 2.88% 2.93% Average 2.35%1.91%2.70%

15 Confidential Draft for Discussion Purposes Only The market is trending towards no or low load funds 5 The business model will most likely provide different load structures, including a deferred sales charge structure 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. Types of Fees Currently Offered on the Market

16 Confidential Draft for Discussion Purposes Only The program will also include SRI screening, independence, and rebalancing 6 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 Rebalancing SRI Screens Independent Investment Consultant 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

17 Confidential Draft for Discussion Purposes Only Pre-Tax Operating Margin~20 – 60 bps Distribution Operating Margin~2 bps Operating Margin ~0-40 bps Fund Management Operating Margin~18 bps MER ~215 bps Fund Expenses~30 bps Fees 2 ~ bps 3 = 103 Other Costs ~70 bps Distribution Cost ~97 bps 2 Cost ~24 bps Total Rev. ~ bps 1 = 26 Cost ~50-60 bps MER ~215 bps Mgt. Fee ~185 bps 1 Fund Expenses~30 bps MER ~215 bps Mgt. Fee ~185 bps 1 Fund Expenses~30 bps Broker-DealerDistributor = Note: 1 Includes management fees, administration fees and redemption fees. 2 Includes trailer fees and 9 Bps of commission amortization. 3 Represents other CAM revenue Source: Credential, Industry Margin Analysis, Wealth Management Blueprint Project Steering Committee Meeting, January 29th, Mgt. Fee ~185 bps 1 Current State Economics: The current model generates low manufacturing margin Revenue to CUs: ~ bps Total Revenue ~60-90 bps Current State = - = - = - = -

18 Confidential Draft for Discussion Purposes Only Revenue from Investor (MER) Pre-tax Operating Margin ~110 bps Distribution Fund Management Operating Margin ~88 bps MER ~235 bps Investment Mgt Fee~28 bps Mgt. Fees ~207 bps Custodial Cost ~13 bps Distribution Cost ~104 bps Operating Margin ~2 bps Operating Margin ~20 bps Cost ~24 bps Total Rev. ~26 bps Cost ~58 bps Broker-DealerDistributor == bps Future State Economics: The proposed structure would increase manufacturing margins = - Infrastr. & Legal Cost ~2 bps Notes: 1 No 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. Revenue to CUs: ~166 bps Fees Received 1 ~104 bps Total Revenue ~78 bps Future State Risk/Return Package, Year 5 (80% of total)

19 Confidential Draft for Discussion Purposes Only Key Issues: A number of key issues have been raised and addressed View that NEI should be one of the leading investment managers responsible for investing a significant portion of the overall mandate NEI Participation as an Investment Manager Discussion Potential Resolution Select NEI to manage in the range of 25%+ of the overall portfolio This percentage is higher than NEIs current share of managed assets for the system overall Issue View that a nationally recognized investment manager(s) should be involved in the program, with material mandates Need Nationally Recognized Managers Recommended approach would have a combination of highly recognized managers (e.g. Mackenzie, Templeton) and quality managers known to investment professionals (e.g. Mawer) View that the program needs to be demonstrably well designed and unbiased so that advisors will be comfortable advocating for the program Program Must be Demonstrably Independent 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) MER Must be Competitive 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 +)

20 Confidential Draft for Discussion Purposes Only 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) Need Multiple Fund Classes Discussion Potential Resolution Ensure that a competitive array of fund classes to accommodate different advisor requirements (e.g. F class, tax class, corporate class) Issue View that credit unions are in part differentiated on their commitment to socially responsible investing Require an Appropriate SRI Screen Recommended that a broad SRI screen be applied that would prevent investment in defined sectors (e.g. tobacco) View that an objective investment track record will be required from the outset to sell the program Need an Investment Track Record 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 number of key issues have been raised and addressed (continued)

21 Confidential Draft for Discussion Purposes Only Concern was raised that there may not be sufficient volumes, particularly if too broad a cross-section of credit unions were required to participate Are there Sufficient Volumes to Proceed Discussion Potential Resolution Estimated volumes from the participating credit unions are $1.8Bn. Minimum threshold is likely $1Bn, which would imply meets thresholds at 50% of expectations Issue Some credit unions strongly prefer a DSC approach and have geared their current economic model around this structure, at least for the near term Need a DSC Structure as well as No / Low Load 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 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. Need Effective Sales Process Support 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: A narrow set of potentially contentious issues have also been largely addressed

22 Confidential Draft for Discussion Purposes Only 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 Are Credit Unions Committed to Moving to a Short Shelf / Proprietary Packaged Model Discussion Potential Resolution 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 Issue 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 Can System Participants Effectively Managed a Shared Program 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 systems behalf ? ? Key Issues: The key issues that remain are affirming commitment to a short shelf business model and governance

23 Confidential Draft for Discussion Purposes Only 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 Status QuoBuying Group Led by a Few Credit Unions 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 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 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 needs Illustrative Options

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