The Financial Planning Association

The Financial Planning AssociationThe Financial Planning Association

Opening AssumptionsOpening 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.

Building Your Business in the ’90s…Building Your Business in the ’90s…

Your Market Share

Asset Growth

Building Your Business in the ’90s…Building Your Business in the ’90s…

Asset Retention = Growth

Building Your Business Today…Building Your Business Today…

You Need to Take AssetsAway From Competitors

The Battle for the Affluent Market

Regaining Investor

Fending Off Name-Brand Brokerage

A Battle on Two FrontsA Battle on Two Fronts

Fending Off Name-Brand Brokerage

A Battle on Two FrontsA Battle on Two Fronts

A battle you won in the past

Two Key FactorsTwo Key Factors

DifferentiationDifferentiation

Flight to Quality

Fee-based Services

Financial Planning

Open Architecture

Wealth Management

Commission-based Services

Sales Culture

Proprietary Product; Revenue Sharing

Differentiated!

Independent Advisors

The 1990sThe 1990s

Enron Auditor Raises Specter

of Crime

Enron Auditor Raises Specter

of Crime Lawmakers Say Files

Show Flagrant

WorldCom Fraud

Lawmakers Say Files

Show Flagrant

WorldCom Fraud

Ex-Tyco Chief

Indicted

Ex-Tyco Chief

Indicted

Adelphia Founder,

Sons Charged

Adelphia Founder,

Sons Charged

U.S. Opens Criminal Probe of

Freddie Mac

U.S. Opens Criminal Probe of

Freddie Mac

Former Chief of ImClone

Systems Charged

Former Chief of ImClone

Systems Charged

Rite Aid Trial Spotlights

Public View of Corporate

Scandals

Rite Aid Trial Spotlights

Public View of Corporate

Scandals

Grasso Quits NYSE

Amid Pay Furor

Grasso Quits NYSE

Amid Pay Furor

Wall St. and Its Analysts Get

Warning From S.E.C.

Wall St. and Its Analysts Get

Warning From S.E.C.

Morgan Stanley Probed on Sales of

Mutual Funds

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

Janus Review Uncovers Improper

Trades

Janus Review Uncovers Improper

Trades

Alliance Suspends 2 Fund Executives in Trading Inquiry

U.S. Appoints a Monitor for Merrill Lynch

Probe Forces Resignations at

Prudential Securities

Probe Forces Resignations at

Prudential Securities

J.P. Morgan to Settle Case Over IPO

Allocations

J.P. Morgan to Settle Case Over IPO

Allocations

Flight to QualityFlight to Quality

Independent Advisor Affluent Market Share

The “Brand” GameThe “Brand” Game

EF Hutton Shearson

Dean Witter

First Union

Prudential

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.

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

Wall Street FirmsWall 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.

Fee-based Services

Financial Planning

Open Architecture

Wealth Management

Commission-based Services

Sales Culture

Proprietary Product; Revenue Sharing

Differentiated!

The 1990sThe 1990s

Fee-based Services

Financial Planning

Open Architecture

Wealth Management

Fee-based Services

Financial Planning

Open Architecture

Wealth Management

Not Differentiated!

TodayToday

Fee-based Services

Financial Planning

Open Architecture

Wealth Management

Hedge Funds

Private Equity

Mortgages

Credit Cards

An EdgeAn Edge

Huge Brand Disparity

Affluent Investors’ Primary AdvisorsAffluent Investors’ Primary Advisors

Source: The Spectrem Group Affluent Study 2005; cited in Investment News, 01/30/06.

Full-Service BrokerFull-Service Broker

Investment AdviserInvestment Adviser

Financial PlannerFinancial Planner

Investment ManagerInvestment Manager

24%20042004

20052005

AccountantAccountant

Discount/Online BrokerDiscount/Online Broker

Trust OfficerTrust Officer

Private BankerPrivate Banker

18%17%

17%14%

20042004

20052005

20042004

20052005

20042004

20052005

20042004

20052005

20042004

20052005

20042004

20052005

20042004

’05’05

“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

A Formidable AdversaryA Formidable Adversary

Sexier Products

Camouflaged in Your

Business Model

Camouflaged in Your

Business Model

Huge Brand

Recognition

Huge Brand

Recognition

The Second FrontThe Second Front

Regaining Investor

Wall Street Analysts Exposed

CEO Scandals

Accountancy Malfeasance

Spitzer Takes on the Mutual Funds Tyco…

Enron… WorldCom

Affluent assets flow away

from advisors

April 17, 2006

Affluent assets flow away

from advisors

April 17, 2006

48.6%Lack of TrustLack of Trust

39%Dissatisfaction with

asset managementDissatisfaction with

asset management

Source: TNS Financial Services of Greenwich, Conn., Annual Survey; cited in Investment News, April 17,2006.

Affluent Investor Attitudes

Quality of serviceQuality of service

Diminishing SatisfactionDiminishing Satisfaction

Quality of adviceQuality of advice

Advisor’s knowledgeAdvisor’s knowledge

Investment PerformanceInvestment Performance

Source: The Spectrem Perspective: The Affluent Investor

59%59%

45%45%

53%53%

32%32%

Satisfaction

Affluent Investors’ Primary AdvisorsAffluent Investors’ Primary Advisors

Source: The Spectrem Group Affluent Study 2005; cited in Investment News, 01/30/06.

Full-Service BrokerFull-Service Broker

Investment AdviserInvestment Adviser

Financial PlannerFinancial Planner

Investment ManagerInvestment Manager

24%20042004

20052005

AccountantAccountant

Discount/Online BrokerDiscount/Online Broker

Trust OfficerTrust Officer

Private BankerPrivate Banker

18%17%

17%14%

20042004

20052005

20042004

20052005

20042004

20052005

20042004

20052005

20042004

20052005

20042004

20052005

20042004

’05’05

Independent

Advisors

Your account is a brokerage account and not an advisory

account. Our interests may not always be the same as yours.

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…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.

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.

We are paid both by you, and sometimes, by people who

compensate us based on what you buy.

Advice Will Bifurcate…Advice Will Bifurcate…

Distributors Advisors

“[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 DonaldsonFormer 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 DonaldsonFormer SEC Chairman

How will youmake the distinction?

Sell-Side Platform

Proprietary ProductsProprietary Products

Either-Or PortfoliosEither-Or Portfolios

Lack of TransparencyLack of Transparency

Biased ResearchBiased Research

ConflictsConflicts

Middleman FeesMiddleman Fees

Complexity Complexity

Sell-Side PlatformSell-Side Platform

Sell-Side Platform

Client-SidePlatform

No Product BiasNo Product Bias

Holistic PortfoliosHolistic Portfolios

TransparencyTransparency

Independent ResearchIndependent Research

No ConflictsNo Conflicts

No Middleman FeesNo Middleman Fees

Clear Expectations Clear Expectations

Client-Side PlatformClient-Side Platform

You change the game again…

just like you did in the 1990s.

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!

Business Solutions for

Portfolio OptimizationPortfolio Optimization

Efficient FrontierEfficient Frontier

Style PurityStyle Purity

BenchmarksBenchmarks

PortfoliosPortfolios

A s s e t A l l o c a t i o n A s s e t A l l o c a t i o n

Portfolio OptimizationPortfolio Optimization

Efficient FrontierEfficient Frontier

Style PurityStyle Purity

BenchmarksBenchmarks

PortfoliosPortfolios

A s s e t A l l o c a t i o n A s s e t A l l o c a t i o n

Theoretical PrecisionHas Overwhelmed

Good Judgment andCommon Sense

What does the Portfolio look like?What does the Portfolio look like?

3-Tier Structure3-Tier Structure

Efficient Market CoreTM

Active RingTM

Alpha RimTM

Two Key PremisesTwo Key Premises

Management ValueHow much value active management can add

depends primarily on market efficiency.

Large Cap = Efficient MarketLarge 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.

* 12/31/83 - 12/31/04.

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 2002.

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.

Management OptimizationManagement OptimizationInstitutional Investors

Indexation

Efficient Market

Exposure

Alternative Investments

Alpha Oriented

TraditionalActively Managed

Investments

45% 40% 15%Approaching

Two Key PremisesTwo Key Premises

Management ValueHow much value active management can add

depends primarily on market efficiency.

Fee CorrelationManagement fees can and should be correlated

to managerial value received.Enhanced Perfo

rmance

Enhanced Perform

Active RingTM

Alpha RimTM

EM CoreTM

Management

Matched to

Market Efficiency

Management

Matched to

Market Efficiency

Active RingTM

Alpha RimTM

EM CoreTM

LowerSmaller-Cap Stocks

High-Yield BondsReal Estate

ActiveMutual Funds

Managed Accounts

Lowest Special Opportunities

Highly SkilledHedge Funds

Private Equity, etc.

Efficiency Management

HighLarger-Cap Stocks

Investment-Grade Bonds

IndexedIndex Funds

Active RingTM

Alpha RimTM

EM CoreTM

Correlated

to Value-Added

Correlated

to Value-Added

Active RingTM

Alpha RimTM

EM CoreTM ModerateCan be significant

HighestCan be very high

Value-Added Fees

Limited Lowest

Intuitive

Transparent

Performance Advantage

Intuitive

Transparent

Performance Advantage

Investors Are ReceptiveInvestors Are Receptive

Example:$1-Million Traditional Portfolio

Fixed Income

Sector Equity

International

Small-Cap Equity

Mid-Cap Equity

Large-Cap Equity

Traditional PortfolioTraditional Portfolio

Mutual FundB/D 2

Mutual FundB/D 1

B/D 1 Managed AccountFIXED INCOME

direct

Mutual Fund

Managed Account

Managed AccountLARGE-CAP EQUITY

MID-CAP EQUITY

Mutual FundB/D 2

Mutual FundB/D 1SMALL-CAP EQUITY

SECTOR EQUITY

Mutual FundB/D 2

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

$17,400

$1,090.40

$351.87

$1,198.50

$52.56

$200.34

$709.25

$1,049.86

$912.00

$5,360.40

$3,738.96

Managed AccountB/D 1

$16,440 1.44% N/A 1.44% $236.74Mutual FundB/D 1

$58,500 N/A 2.40% 2.40% $1,404.00

$901.46

$292.39

$340.47

$1,501.92

$708.18

$587.88

$372.09

$191.07

$280.14

JMIBX JP Morgan Bond Instl

TBHYX Pioneer High Yield B

-- Lord Abbett Bond

VFINX Vanguard 500 Index

JANSX Janus

EQPIX Fidelity Advisor Equity Income Instl

AIPGX AllianceBernstein Premier Gr Instl I

PBODX Pioneer B

-- Engemann Large Cap

-- Lord Abbett Large Cap

FSCIX Fidelity Advisor Small Cap Instl

GTSDX AIM Small Cap Growth C

FIDIX John Hancock Financial Industries I

IARCX AIM Real Estate C

SLMCX Seligman Communications&Information A

FSPHX Fidelity Select Health Care

RABTX PIMCO RCM Biotechnology A

TEDMX Templeton Developing Markets A

-- Brandes Investment Partners

-- Roxbury Mid Cap

GABVX Gabelli Value A

Instrument Fee

AdvisoryFee

TotalFee (%)

Total Fee ($)Amount

Type of InvestmentFirm Symbol Investment

TotalPortfolio

$1,029,945

WeightedAverage Fee

TotalAnnual Fee$21,480.47

Current ManagementCurrent Management

direct

$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

-- Lord Abbett Bond

JANSX Janus

PBODX Pioneer B

-- Roxbury Mid Cap

FIXED INCOME

LARGE-CAP EQUITY

MID-CAP EQUITY

SMALL-CAP EQUITY

SECTOR EQUITY

INTERNATIONAL

$1,090.40

$351.87

$1,198.50

$52.56

$200.34

$709.25

$1,049.86

$912.00

$5,360.40

$3,738.96

1.44% N/A 1.44% $236.74

N/A 2.40% 2.40% $1,404.00

$901.46

$292.39

$340.47

$1,501.92

$708.18

$587.88

$372.09

$191.07

$280.14

Instrument Fee

AdvisoryFee

TotalFee (%)

Total Fee ($)Amount

Indexed Active Alpha

Management-Optimization OverlayManagement-Optimization Overlay

direct

$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

-- Lord Abbett Bond

JANSX Janus

PBODX Pioneer B

-- Roxbury Mid Cap

FIXED INCOME

LARGE-CAP EQUITY

MID-CAP EQUITY

SMALL-CAP EQUITY

SECTOR EQUITY

INTERNATIONAL

U s e I n d e x e s

$1,090.40

$351.87

$1,198.50

$52.56

$200.34

$709.25

$1,049.86

$912.00

$5,360.40

$3,738.96

1.44% N/A 1.44% $236.74

N/A 2.40% 2.40% $1,404.00

$901.46

$292.39

$340.47

$1,501.92

$708.18

$587.88

$372.09

$191.07

$280.14

Instrument Fee

AdvisoryFee

TotalFee (%)

Total Fee ($)Amount

Indexed Active Alternative

$100,510 1.50% 0.50%ALTERNATIVE

$163,798 1.00% 0.50% ACTIVE

Management-Optimized PortfolioManagement-Optimized Portfolio

TotalPortfolio

$1,029,945

WeightedAverage Fee

TotalAnnual Fee

$9,444

AverageInstrument Advisory

Tier Amount Fee Fee

INDEXED-Fixed Income $163,641 0.15% 0.50%

INDEXED-Equity $601,996 0.15% 0.50%

Traditional Structure Optimized Structure

WeightedAverage Fee

TotalAnnual Fee

$9,444

WeightedAverage Fee

TotalAnnual Fee

$21,480

The “Three Tier” AdvantageThe “Three Tier” Advantage

117 bp Lower 117 bp Lower

$12,037 Less

$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 Value 5 Years 10 Years 15 Years 20 Years 25 Years

$1,136m

$2,137m

m = thousands (000)

Traditional Portfolio

Based on a 10% (pre-fee, pre-tax) rate of return.

Management-Optimized Portfolio

HypotheticalPerformance AdvantageHypotheticalPerformance Advantage

$2,009m

$2,806m

$3,919m

$5,474m

$1,572m

$2,400m

$3,665m

$5,595m

$8,541m

$1,438m

$1,030m $1,030m

Initial Value 5 Years 10 Years 15 Years 20 Years 25 Years

$1,676m

$3,068m

HypotheticalPerformance AdvantageINCLUDING 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

What does Research look like?What does Research look like?

RogersCasey

Forward-Looking Fundamental Research

Independent, Unbiased

“Actionable Intelligence”

Best-of-Breed Manager Recommendations Best-of-Breed Manager Recommendations

Coverage of Major Custody PlatformsCoverage of Major Custody Platforms

Fidelity

Pershing

Schwab

TD Ameritrade

Fidelity

Pershing

Schwab

TD Ameritrade

No Products! No Payments! No Conflicts!No Products! No Payments! No Conflicts!

Active Ring

Defined by Asset Class characteristics

Manager Recommendations for SW PortfoliosManager Recommendations for SW Portfolios

Alpha Rim

Defined by Manager characteristics

Alpha Rim: Defining CharacteristicsAlpha 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

What does Reporting look like?What does Reporting look like?

Active RingTM

Alpha RimTM

EM CoreTM Above-Market Return

With above-marketshort-term volatility

Absolute ReturnWith above-market volatility

and increased illiquidity

Market Return

Clearer, More Realistic ExpectationsClearer, More Realistic Expectations

Integrated With MethodologyIntegrated With Methodology

Market Return Above-Market

Absolute Return Combined

Reflects ExpectationsReflects Expectations

Reinforces ExpectationsReinforces Expectations

Differentiate from DistributorsDifferentiate from Distributors

Market-Share / Business Growth

Compete against the Wall Street GiantsCompete against the Wall Street Giants

Foster Investor TrustFoster Investor Trust

Increase Asset Management EfficiencyIncrease Asset Management Efficiency

Enhance PerformanceEnhance Performance

Promote Realistic ExpectationsPromote Realistic Expectations

The Financial Planning AssociationThe Financial Planning Association

The Financial Planning Association

investment news

affluent investor59es2

spectrem group affluent

business todayaumthe

business models

wall street journalblackrock

wall street firmsoff

brand brokerage firms

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