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The Financial Planning Association. Opening Assumptions Future market growth will be slower than in the past. This greatly affects how you build your.

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Presentation on theme: "The Financial Planning Association. Opening Assumptions Future market growth will be slower than in the past. This greatly affects how you build your."— Presentation transcript:

1 The Financial Planning Association

2 Opening Assumptions Future market growth will be slower than in the past. This greatly affects how you build your business going forward. Future market growth will be slower than in the past. This greatly affects how you build your business going forward.

3 Building Your Business in the ’90s… AUM Your Market Share

4 Asset Growth Building Your Business in the ’90s… AUM Asset Retention = Growth

5 AUM Building Your Business Today… You Need to Take Assets Away From Competitors

6 The Battle for the Affluent Market The Battle for the Affluent Market

7 Regaining Investor Trust Fending Off Name-Brand Brokerage Firms A Battle on Two Fronts

8 Fending Off Name-Brand Brokerage Firms A Battle on Two Fronts A battle you won in the past

9 Two Key Factors Differentiation Flight to Quality Flight to Quality

10 Fee-based Services Financial Planning Open Architecture Wealth Management Commission-based Services Sales Culture Proprietary Product; Revenue Sharing Differentiated! Independent Advisors The 1990s

11 Enron Auditor Raises Specter of Crime Lawmakers Say Files Show Flagrant WorldCom Fraud Ex-Tyco Chief Indicted Adelphia Founder, Sons Charged Adelphia Founder, Sons Charged U.S. Opens Criminal Probe of Freddie Mac Former Chief of ImClone Systems Charged Rite Aid Trial Spotlights Public View of Corporate Scandals Grasso Quits NYSE Amid Pay Furor Grasso Quits NYSE Amid Pay Furor

12 Wall St. and Its Analysts Get Warning From S.E.C. Morgan Stanley Probed on Sales of Mutual Funds Criminal Charges May Be Filed In Bank of America Fund Case Criminal Charges May Be Filed In Bank of America Fund Case Strong Capital Faces Calls for Audit Janus Review Uncovers Improper Trades Alliance Suspends 2 Fund Executives in Trading Inquiry U.S. Appoints a Monitor for Merrill Lynch U.S. Appoints a Monitor for Merrill Lynch Probe Forces Resignations at Prudential Securities J.P. Morgan to Settle Case Over IPO Allocations

13 Flight to Quality % 47% 2004 Independent Advisor Affluent Market Share

14

15 The “Brand” Game EF HuttonShearson Dean Witter First Union Prudential

16 Citigroup and Legg Mason Release Details of Asset Swap June 25, 2005 In a widely anticipated deal that highlights the financial and regulatory pressures facing Wall Street, Citigroup and Legg Mason yesterday announced the details of a $3.7 billion asset swap that would catapult Legg Mason to the ranks of the nation’s largest money managers.

17 THE WALL STREET JOURNAL BlackRock and Merrill Lynch Investment Management to Combine, Forming One of the World’s Largest Independent Investment Management Firms Combined Firm to Have $1 Trillion in Assets Under Management Will Operate Under BlackRock Name; Merrill Lynch to Have a 50% Stake February 15, 2006

18 Wall Street Firms Off-loading their commoditized proprietary products… but keeping their “sexy’ products, such as hedge funds and private equity. Off-loading their commoditized proprietary products… but keeping their “sexy’ products, such as hedge funds and private equity.

19 Fee-based Services Financial Planning Open Architecture Wealth Management Commission-based Services Sales Culture Proprietary Product; Revenue Sharing Differentiated! Independent Advisors The 1990s

20 Fee-based Services Financial Planning Open Architecture Wealth Management Fee-based Services Financial Planning Open Architecture Wealth Management Not Differentiated! Independent Advisors Today

21 Fee-based Services Financial Planning Open Architecture Wealth Management Independent Advisors Hedge Funds Private Equity Mortgages Credit Cards An Edge

22 Huge Brand Disparity

23 Affluent Investors’ Primary Advisors Source: The Spectrem Group Affluent Study 2005; cited in Investment News, 01/30/06. Full-Service Broker Investment Adviser Financial Planner Investment Manager 24% Accountant Discount/Online Broker Trust Officer Private Banker 31% 18% 17% 14% 9% 10% 9% 3% 7% 2% 3% 1% ’05

24 “Several factors contributed to the increase, including…the chameleon-like ability of the wirehouses to make their business models look more like those of financial planners …” “Several factors contributed to the increase, including…the chameleon-like ability of the wirehouses to make their business models look more like those of financial planners …” Source: Quoted in Investment News, 01/30/06. George Walpert, president, The Spectrem Group George Walpert, president, The Spectrem Group

25 A Formidable Adversary Sexier Products Sexier Products Camouflaged in Your Business Model Camouflaged in Your Business Model Huge Brand Recognition Huge Brand Recognition

26 The Second Front Regaining Investor Trust

27 Wall Street Analysts Exposed CEO Scandals Accountancy Malfeasance Spitzer Takes on the Mutual Funds Tyco… Enron… WorldCom

28 Affluent assets flow away from advisors April 17, 2006

29 Affluent assets flow away from advisors April 17, % Lack of Trust 39% Dissatisfaction with asset management Source: TNS Financial Services of Greenwich, Conn., Annual Survey; cited in Investment News, April 17,2006.

30 Affluent Investor Attitudes Quality of service Diminishing Satisfaction Quality of advice Advisor’s knowledge Investment Performance Source: The Spectrem Perspective: The Affluent Investor 59% 45% 53% 32% Satisfaction

31

32

33 Affluent Investors’ Primary Advisors Source: The Spectrem Group Affluent Study 2005; cited in Investment News, 01/30/06. Full-Service Broker Investment Adviser Financial Planner Investment Manager 24% Accountant Discount/Online Broker Trust Officer Private Banker 31% 18% 17% 14% 9% 10% 9% 3% 7% 2% 3% 1% ’05

34 Independent Advisors

35

36 Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. New SEC Required Disclosure… Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you, and sometimes, by people who compensate us based on what you buy.

37 Advice Will Bifurcate… Distributors Advisors

38 “[The Merrill rule] is a good sales tool [for advisors. The new rule] advances the distinctions between brokers and advisors, between fiduciary and suitability.” William Donaldson Former SEC Chairman “[The Merrill rule] is a good sales tool [for advisors. The new rule] advances the distinctions between brokers and advisors, between fiduciary and suitability.” William Donaldson Former SEC Chairman

39 How will you make the distinction? How will you make the distinction?

40 Distributors Advisors Sell-Side Platform

41 Proprietary Products Either-Or Portfolios Lack of Transparency Biased Research Conflicts Middleman Fees Complexity Sell-Side Platform

42 Distributors Advisors Sell-Side Platform Client-Side Platform

43 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations Client-Side Platform

44 You change the game again… just like you did in the 1990s.

45 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations You can do this! They can’t! And, they won’t! Differentiated Again! Independent Advisors

46 Business Solutions for Independent Advisors

47 Portfolio Optimization VBG L M S Efficient Frontier Style Purity Benchmarks Portfolios A s s e t A l l o c a t i o n

48 Portfolio Optimization VBG L M S Efficient Frontier Style Purity Benchmarks Portfolios A s s e t A l l o c a t i o n Theoretical Precision Has Overwhelmed Good Judgment and Common Sense

49 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations Client-Side Platform What does the Portfolio look like?

50 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations Client-Side Platform What does the Portfolio look like?

51 3-Tier Structure Efficient Market Core TM Active Ring TM Alpha Rim TM

52 Two Key Premises Management Value How much value active management can add depends primarily on market efficiency.

53 Large Cap = Efficient Market The largest 100 companies dominate the S&P 500 Index. “Negative-sum game”: 1.5% avg. fund expense ratio + 0.9% transaction costs = 2.4% handicap. * 12/31/ /31/04. Accumulation on a $10,000 investment over the last 21 years:* - Avg. Equity Mutual Fund: $81,000 - S&P 500: $127,000 Only 1.8% of large cap managers beat the market in all 4 years from 1999 to For taxable investors, the results are even more dramatic: Active management creates additional tax drag of 2.5% annually. Drivers of market efficiency: Internet, institutional ownership, and low transaction costs.

54 Management Optimization Institutional Investors Indexation Efficient Market Exposure Alternative Investments Alpha Oriented Traditional Actively Managed Investments 45%40% 15% Approaching

55 Two Key Premises Management Value How much value active management can add depends primarily on market efficiency. Fee Correlation Management fees can and should be correlated to managerial value received. Enhanced Performance

56 Active Ring TM Alpha Rim TM EM Core TM Management Matched to Market Efficiency Management Matched to Market Efficiency

57 Active Ring TM Alpha Rim TM EM Core TM Lower Smaller-Cap Stocks High-Yield Bonds Real Estate Active Mutual Funds Managed Accounts Lowest Special Opportunities Highly Skilled Hedge Funds Private Equity, etc. EfficiencyManagement High Larger-Cap Stocks Investment-Grade Bonds Indexed Index Funds ETFs

58 Active Ring TM Alpha Rim TM EM Core TM Fees Correlated to Value-Added Fees Correlated to Value-Added

59 Active Ring TM Alpha Rim TM EM Core TM Moderate Can be significant Highest Can be very high Value-Added Fees Limited Lowest

60 Intuitive Transparent Fair Performance Advantage Intuitive Transparent Fair Performance Advantage Investors Are Receptive

61 Example: $1-Million Traditional Portfolio Example: $1-Million Traditional Portfolio Fixed Income Sector Equity International Small-Cap Equity Mid-Cap Equity Large-Cap Equity

62 Traditional Portfolio Mutual FundB/D 2 Mutual FundB/D 1 Managed Account FIXED INCOME direct B/D 2 B/D 1 Mutual Fund Managed Account LARGE-CAP EQUITY MID-CAP EQUITY Mutual FundB/D 2 Mutual FundB/D 1 SMALL-CAP EQUITY SECTOR EQUITY Mutual FundB/D 2 Mutual FundB/D 1 Mutual FundB/D 1 Mutual FundB/D 1 Mutual FundB/D 1 INTERNATIONAL Mutual FundB/D 1 Managed AccountB/D 1 $43,791 $19,020 $119,850 $29,200 $22,510 $26,764 $36,202 $45,600 $223,350 $155,790 $30,558 $14,475 $15,690 $62,580 $24,420 $24,805 $23,700 $19,300 $17, % 1.85% N/A 0.18% 0.89% 0.65% 0.90% 2.00% N/A 0.95% 2.02% 2.17% N/A 0.90% 2.37% 1.57% 0.99% 1.61% 2.00% N/A 1.00% N/A 2.00% N/A 2.40% 2.00% N/A 2.40% 2.00% N/A 2.49% 1.85% 1.00% 0.18% 0.89% 2.65% 2.90% 2.00% 2.40% 2.95% 2.02% 2.17% 2.40% 2.90% 2.37% 1.57% 0.99% 1.61% $1, $ $1, $52.56 $ $ $1, $ $5, $3, Managed AccountB/D 1 $16, %N/A1.44%$ Mutual FundB/D 1 $58,500N/A2.40% $1, $ $ $ $1, $ $ $ $ $ JMIBXJP Morgan Bond Instl TBHYXPioneer High Yield B --Lord Abbett Bond VFINXVanguard 500 Index JANSXJanus EQPIXFidelity Advisor Equity Income Instl AIPGXAllianceBernstein Premier Gr Instl I PBODXPioneer B --Engemann Large Cap --Lord Abbett Large Cap FSCIXFidelity Advisor Small Cap Instl GTSDXAIM Small Cap Growth C FIDIXJohn Hancock Financial Industries I IARCXAIM Real Estate C SLMCXSeligman Communications&Information A FSPHXFidelity Select Health Care RABTXPIMCO RCM Biotechnology A TEDMXTempleton Developing Markets A --Brandes Investment Partners --Roxbury Mid Cap GABVXGabelli Value A Instrument Fee Advisory Fee Total Fee (%) Total Fee ($) Amount Type of Investment FirmSymbol Investment Total Portfolio $1,029,945 Weighted Average Fee 2.09% Total Annual Fee $21,480.47

63 Current Management B/D 2 B/D 1 direct B/D 2 B/D 1 B/D 2 B/D 1 B/D 2 B/D 1 $43,791 $19,020 $119,850 $29,200 $22,510 $26,764 $36,202 $45,600 $223,350 $155,790 $30,558 $14,475 $15,690 $62,580 $24,420 $24,805 $23,700 $19,300 $17,400 B/D 1 $16,440 $58,500 Mutual Fund Managed Account Mutual Fund Managed Account Mutual Fund Managed Account Mutual Fund JMIBXJP Morgan Bond Instl TBHYXPioneer High Yield B --Lord Abbett Bond VFINXVanguard 500 Index JANSXJanus EQPIXFidelity Advisor Equity Income Instl AIPGXAllianceBernstein Premier Gr Instl I PBODXPioneer B --Engemann Large Cap --Lord Abbett Large Cap FSCIXFidelity Advisor Small Cap Instl GTSDXAIM Small Cap Growth C FIDIXJohn Hancock Financial Industries I IARCXAIM Real Estate C SLMCXSeligman Communications&Information A FSPHXFidelity Select Health Care RABTXPIMCO RCM Biotechnology A TEDMXTempleton Developing Markets A --Brandes Investment Partners --Roxbury Mid Cap GABVXGabelli Value A FIXED INCOME LARGE-CAP EQUITY MID-CAP EQUITY SMALL-CAP EQUITY SECTOR EQUITY INTERNATIONAL 0.49% 1.85% N/A 0.18% 0.89% 0.65% 0.90% 2.00% N/A 0.95% 2.02% 2.17% N/A 0.90% 2.37% 1.57% 0.99% 1.61% 2.00% N/A 1.00% N/A 2.00% N/A 2.40% 2.00% N/A 2.40% 2.00% N/A 2.49% 1.85% 1.00% 0.18% 0.89% 2.65% 2.90% 2.00% 2.40% 2.95% 2.02% 2.17% 2.40% 2.90% 2.37% 1.57% 0.99% 1.61% $1, $ $1, $52.56 $ $ $1, $ $5, $3, %N/A1.44%$ N/A2.40% $1, $ $ $ $1, $ $ $ $ $ Instrument Fee Advisory Fee Total Fee (%) Total Fee ($) Amount Type of Investment FirmSymbol Investment Indexed Active Alpha

64 Management-Optimization Overlay B/D 2 B/D 1 direct B/D 2 B/D 1 B/D 2 B/D 1 B/D 2 B/D 1 $43,791 $19,020 $119,850 $29,200 $22,510 $26,764 $36,202 $45,600 $223,350 $155,790 $30,558 $14,475 $15,690 $62,580 $24,420 $24,805 $23,700 $19,300 $17,400 B/D 1 $16,440 $58,500 Mutual Fund Managed Account Mutual Fund Managed Account Mutual Fund Managed Account Mutual Fund JMIBXJP Morgan Bond Instl TBHYXPioneer High Yield B --Lord Abbett Bond VFINXVanguard 500 Index JANSXJanus EQPIXFidelity Advisor Equity Income Instl AIPGXAllianceBernstein Premier Gr Instl I PBODXPioneer B --Engemann Large Cap --Lord Abbett Large Cap FSCIXFidelity Advisor Small Cap Instl GTSDXAIM Small Cap Growth C FIDIXJohn Hancock Financial Industries I IARCXAIM Real Estate C SLMCXSeligman Communications&Information A FSPHXFidelity Select Health Care RABTXPIMCO RCM Biotechnology A TEDMXTempleton Developing Markets A --Brandes Investment Partners --Roxbury Mid Cap GABVXGabelli Value A FIXED INCOME LARGE-CAP EQUITY MID-CAP EQUITY SMALL-CAP EQUITY SECTOR EQUITY INTERNATIONAL U s e I n d e x e s 0.49% 1.85% N/A 0.18% 0.89% 0.65% 0.90% 2.00% N/A 0.95% 2.02% 2.17% N/A 0.90% 2.37% 1.57% 0.99% 1.61% 2.00% N/A 1.00% N/A 2.00% N/A 2.40% 2.00% N/A 2.40% 2.00% N/A 2.49% 1.85% 1.00% 0.18% 0.89% 2.65% 2.90% 2.00% 2.40% 2.95% 2.02% 2.17% 2.40% 2.90% 2.37% 1.57% 0.99% 1.61% $1, $ $1, $52.56 $ $ $1, $ $5, $3, %N/A1.44%$ N/A2.40% $1, $ $ $ $1, $ $ $ $ $ Instrument Fee Advisory Fee Total Fee (%) Total Fee ($) Amount Type of Investment FirmSymbol Investment Indexed Active Alternative

65 $100, % 0.50%ALTERNATIVE $163, % 0.50%ACTIVE Management-Optimized Portfolio Total Portfolio $1,029,945 Weighted Average Fee 0.92% Total Annual Fee $9,444 Average Instrument Advisory Tier Amount FeeFee INDEXED-Fixed Income$163, %0.50% INDEXED-Equity $601, %0.50%

66 Traditional StructureOptimized Structure Weighted Average Fee 0.92% Total Annual Fee $9,444 Weighted Average Fee 2.09% Total Annual Fee $21,480 The “Three Tier” Advantage 117 bp Lower 117 bp Lower $12,037 Less $12,037 Less

67 $2,206m $3,229m $4,725m $6,915m $2,457m $3,795m $5,861m $9,052m $1,507m $1,030m $1,591m $1,030m Initial Value5 Years10 Years15 Years20 Years25 Years $84m $251m $566m $1,136m $2,137m m = thousands (000) Traditional Portfolio Based on a 10% (pre-fee, pre-tax) rate of return. Management-Optimized Portfolio Hypothetical Performance Advantage Hypothetical Performance Advantage

68 $2,009m $2,806m $3,919m $5,474m $1,572m $2,400m $3,665m $5,595m $8,541m $1,438m $1,030m Initial Value5 Years10 Years15 Years20 Years25 Years $134m $391m $859m $1,676m $3,068m Hypothetical Performance Advantage INCLUDING TRANSACTION COSTS* Hypothetical Performance Advantage INCLUDING TRANSACTION COSTS* *Transaction cost assumptions: Current portfolio 1.00%; Skill-Weighted Portfolio 0.25%. These costs include trading expenses, spread costs, market impact, interest expense and opportunity cost (due to holding cash). m = thousands (000) Traditional Portfolio Based on a 10% (pre-fee, pre-tax) rate of return. Management-Optimized Portfolio

69 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations Client-Side Platform What does Research look like?

70 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations Client-Side Platform What does Research look like?

71 RogersCasey Forward-Looking Fundamental Research Independent, Unbiased “Actionable Intelligence” Best-of-Breed Manager Recommendations

72 Coverage of Major Custody Platforms Fidelity Pershing Schwab TD Ameritrade Fidelity Pershing Schwab TD Ameritrade No Products! No Payments! No Conflicts!

73 Active Ring Defined by Asset Class characteristics Manager Recommendations for SW Portfolios Alpha Rim Defined by Manager characteristics

74 Alpha Rim: Defining Characteristics  Talent  Unobservable investment process  Specific ROI expectation  Strategy unconstrained  Risk defined by capital loss  Idiosyncratic (stock-specific) risk  Low benchmark sensitivity  Research-intensive  Liquidity variable  Willingness to hold cash  High concentration  Tactical  Inefficient markets and/or complex  Alternative securities / non-benchmark securities  Currency skill Talent

75 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations Client-Side Platform What does Reporting look like?

76 No Product Bias Holistic Portfolios Transparency Independent Research No Conflicts No Middleman Fees Clear Expectations Client-Side Platform What does Reporting look like?

77 Active Ring TM Alpha Rim TM EM Core TM Above-Market Return With above-market short-term volatility Absolute Return With above-market volatility and increased illiquidity Market Return Clearer, More Realistic Expectations

78 Integrated With Methodology

79 Market ReturnAbove-MarketAbsolute ReturnCombined Reflects Expectations

80 Reinforces Expectations

81 Client-Side Platform Differentiate from Distributors Market-Share / Business Growth Compete against the Wall Street Giants Foster Investor Trust Increase Asset Management Efficiency Enhance Performance Promote Realistic Expectations

82 The Financial Planning Association


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