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1

State of the Managed Accounts Industry

ONE VOICE: 2008 FSI BROKER-DEALER CONFERENCE

Cerulli AssociatesJanuary 29, 2008

Cerulli AssociatesJanuary 29, 2008

2

Cerulli Associates Managed Accounts Research

Decade-long pioneering

coverage and analysis

Proprietary database tracking

key attributes from more than

330 asset managers and sponsor

programs on a quarterly basis

Research utilizes qualitative

interviews, surveys, and third-

party research

3

Agenda

Industry Overview

-Market-sizing

-Growth rates and drivers of growth

Overlay and UMA Outlook

-Industry impact

-Existing UMA programs

Role of the Advisor

-Importance of managed accounts (fee-based advisory) to advisors

-Advisor usage

Industry Outlook

-Role of managed accounts in retirement solutions

-New entrants to industry

-Projections

4

?

How do we progress fee-based advice delivery toward better meeting client goals?

How do we reap the benefits of overlay without upsetting the successof existing managed accounts programs?

Issues to Ponder


5

Industry Overview

6

Mutual fund

advisory

26%, $513 b

Unified managed

account

2%, $35 b

Fee-based

brokerage

11%, $214 b

Rep as advisor

8%, $154 b Separate account

consultant programs

42%, $825 bRep as portfolio

manager

12%, $229 b

Separate account programs are the oldest; UMAs are the newest

The Nearly $2.0 Trillion Managed AccountsMarketplace Has Six Program Types

Source: Cerulli Associates

Managed Account Asset Share by Program Type, 3Q 2007 (%)

7

Fee-Based Managed Account Assets Have More Than Tripled Since 1999


3.75-year CAGR of 15.4%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

1999 2000 2001 2002 2003 2004 2005 2006 3Q 2007

Unified managed accounts Rep as advisor Rep as portfolio managerFee-based brokerage Mutual fund advisory Separate accounts

$744 b

$754 b$612

b

$998 b

$1.42 t

$1.21 t

($ billions)

$793 b

$1.73 t

$1.97 t

8

$3,126

$5,110

$4,254$3,958$3,829

$3,470$3,316$3,695

$4,580

$542$459$239

$551 $499 $683 $791 $909 $1,0597%

21%

17%16%16%15%

19% 20%

12%

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

0%

5%

10%

15%

20%

25%

30%

Total wirehouse client assets Wirehouse assets in managed accounts

% in managed accounts

Wirehouse Client Assets in Managed Account Programs ($ billions)

Managed Accounts Have Increased Dramaticallyin the Most Powerful U.S. Distribution Channel

Sources: Cerulli Associates, Company reports

Wirehouse activity serves as an industry barometer

9

$479

$888

$376 $349$450

$750

$588$547

$395$417

$728

$833

$977$1,083

-7%

29%

6%

28%

18%

33%

17%

23%

-5%

14%

39%

11%

$0

$200

$400

$600

$800

$1,000

$1,200

2001 2002 2003 2004 2005 2006 3Q 2007

-10%

0%

10%

20%

30%

40%

Discretionary assets Nondiscretionary assets

% growth discretionary assets % growth nondiscretionary assets

Discretionary vs. Nondiscretionary Managed Account Assets ($ billions)

Discretionary Programs Have Outpaced Nondiscretionary Programs


An increased number of firms are looking at discretionary programs

10

Managed Accounts Exhibiting Double-Digit Growth


Advisory success has been widespread

Program2002

($ bil)

2003($

bil)

2004($ bil)

2005($ bil)

2006($ bil)

3Q 2007($ bil)

3.75-Year CAGR

Separate Account Consultant

$384 $495 $588 $668 $747 $825 11.4%

Subadvisory programs $212 $286 $398 $447 $509 $559 15.2%

Open programs $172 $209 $190 $221 $238 $266 5.2%

Mutual Fund Advisory $126 $174 $229 $298 $403 $513 25.6%

Rep as Portfolio Manager $62 $80 $108 $139 $183 $229 24.8%

Fee-Based Brokerage $150 $220 $235 $250 $276 $214 (0.6%)

Rep as Advisor $23 $30 $42 $58 $91 $154 41.1%

Unified Managed Account N/A N/A $4 $8 $27 $35 N/A

Total managed accounts industry

$744 $998$1,20

7$1,42

4$1,72

8$1,97

0 15.4%

Growth rate (6%) 34% 21% 18% 22% 14%

11

Wirehouses Remain King, but Other Channels Making Strides

72% 69% 67% 68% 65% 64% 61% 60%

8%8% 8% 8% 10% 11% 12% 13%

7% 8% 9% 9% 10% 10% 11% 11%

11% 12% 12% 9% 9% 8% 8% 7%

0%

20%

40%

60%

80%

100%

1999 2000 2002 2003 2004 2005 2006 3Q 2007

Wirehouse Independent Third-party vendor Regional Discount Bank


IBD channel ranks 2nd at 24%+ (IBD at 13% and most of TPV channel at 11%)

Managed Accounts by Distribution Channel

12

Wirehouses Claim Top 5 Spots

22.3%

2.7%

3.3%

3.4%

3.7%

4.0%

8.0%

8.6%

8.8%

17.1%

18.1%

All Others

Raymond James

Fidelity Investments

LPL Financial

Charles Schwab

Ameriprise

Wachovia

UBS

Morgan Stanley

Citigroup

Merrill Lynch

A.G. Edwards acquisition ($39b) will push Wachovia to third place

3Q 2007 Managed Accounts Marketshare


13

Formula for Continued Success


Managed accounts success across programs and channels

Boiling down the equation for sustained growth

Asset Management Meritocracy

Fee-Based Advice Model

Modern Portfolio Theory

MAGs/Professional Buyer

+

+

+

=

14

?

Market sizing

Growth across programs and broker/dealers

Growth drivers

Recap and Questions


15

Overlay and UMA Outlook

16

Defining Overlay Management

Overlay is the process of systematically applying individual clientaccount-level intelligence to the investment process

Role of Overlay Between Model Portfolio and Client Account


Overlay Managemen

t

Asset Manager Client Portfolio

Client infoInvestment Research

Trades

Trade

Decisions

Buy AAPL

Model Portfolio

Buy RIMM

Buy GOOG

Sell GRMN

Buy AAPL

Buy RIMM

No action

Wait to trade

17

Large

growth,

35%

Large

value, 35%

Core fixed

income,

30%


100% Separate Accounts (SMA)

Muni bond,

15%

Smid,

15% Int'l. equity,

20%

Large core,

30%

Core fixed

income, 20%

Separate account

via model portfolio

UMA Environment

Mutual funds

ETFs

Separate account, plus no-fee mutual

funds

In the past, advisors’ choice would be all SMA orunallocated mix of SMA and other products

UMAs Will Create Flexibility in ProgramsPreviously Constrained by Vehicle Type

UMA Example for an $800,000 Client

Mutual funds

18


Stage 1

• Asset-manager generated FOF portfolio of separate accounts, typically using affiliates

• Not client-specific, but rather packaged

• Brings diversified separate account portfolios downmarket

Stage 2

• B/D sponsor takes control

• Apply to separate accounts via model portfolios specific to client profile

• Tax optimization

Stage 3

• Used by MAG or advisor within UMA to blend multiple vehicles into portfolio based on client need

• Enhanced portfolio construction possibilities

Product focus

Client focus

Going Beyond Blended Products; Overlay PortfolioManagement Evolves Client Experience

Overlay management poised to be a fundamental componentof all UMAs and advice delivery process

19

Enhancing Portfolio Construction

Exchange-Traded Funds

Separate Accounts

Hedge FundsMutual Funds

Individual Equities

Bonds

Modern Portfolio Construction?

How will better solutions be delivered to clients?Source: Cerulli Associates

PassiveManagement

ActiveManagement

Investor TimeHorizons

Liquidity and Distribution

Absolute Return

20

Unified Managed Account Programs

FirmAUM ($

millions)3Q

Growth% in SMA Packaging

Wachovia $14,648 4.1% 99%Hybrid/

Packaged

Morgan Stanley $13,515 6.7% 83% Open

Lockwood Financial/Pershing $1,190 10.3% 23% Packaged

LPL Financial $1,092 10.7% 79% Hybrid

UBS $1,003 1.3% 84% Open

RBC Dain Rauscher $962 3.9% 73% Hybrid

Bank of America $888 50.0% 66% Packaged

Brinker Capital $392 26.3% 60% Packaged

ADVISORport/PFPC $281 6.4% - Hybrid

1st Global $280 10.3% 70% Hybrid


All channels are launching UMA programs, though they are varied … Unified Managed Account Programs, 3Q 2007

21

43%

18%

70%

44%

4%9%

74%

11%

54%

14%

0%

20%

40%

60%

80%

Will deliver betterexperience for the

client

Will deliver betterperformance for the

client

Too early to tell Too expensive More marketing oversubstance

Program sponsors Asset managers

Attitudes on Overlay Management


Asset managers have their doubts about performance enhancement

22

Flexibility Will Continue to Evolve

Trading Control

• Hybrid overlay is necessary for holistic portfolios

• Alleviates some asset manager objections

Pricing• Band of pricing flexibility allows free market—“range pricing”

• Depends on nondiscretionary and unbundled structure

Presentation to Client

• Facilitates pricing flexibility

• Performance transparency


How can sponsors and asset managers maintain equationfor success in a changing environment?

23

$201 $1,092$987$373 $521 $670 $852

$34,104$32,106$30,889

$37,010$40,012

$43,361

$52,866

86%

11%16%

16%

27%

40%

29%

8%6%

4%9% 8%

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

1Q 2006 2Q 2006 3Q 2006 4Q 2006 1Q 2007 2Q 2007 3Q 2007

0%

20%

40%

60%

80%

100%

PWP assets SAM assets PWP growth SAM growth


LPL Example: Strategic Asset Management (SAM) and Personal Wealth Portfolios (PWP)

Although SAM is established and PWP is fledgling, it will be interesting to follow as a case study

($ millions)

24

?

Description of overlay management

Overlay mechanics vs. paradigm shift

Are UMA programs developing the way you expected?

Recap and Questions


25

Role of the Advisor

26

Advisor Migration

Independent Broker/Dealer

88,802

NFS69,249

Regional14,285

Insurance34,800

RIA13,622

Dually Registered

9,477

Losing Advisors

Gaining Advisors

Advisors are shifting to more independent distribution channels

Sources: Securities Industry Association, Investment News, Financial Planning, Bank Insurance Market Research Group, National Regulatory Services, Cerulli Associates

27

Forces Driving Managed Accounts


Push and pull factors combine to fuel increased growth

B/D Push factors

• Recurring revenues

• Compliance concerns

• Advisor retention

• Encourages financial planning

• Encourages teams

• Program assets sticky

+Advisor

Adoption ofManaged Accounts

Advisor Pull Factors

• Professionally outsourced asset management (ProBuyer)

• Pursue more affluent clients

• More time to develop and deepen client relationships

• Increase in compliance oversight

=

28

Advisor Compensation by Channel, 2007

Open architecture, fee-based pricing: Everyone starts to look like an RIA

Fee-Based Pricing Is Occurring Everywhere


17%25%

18%10%

3%

20%

14%

26%

41%

26%

25%

9%

26%

8%

57%

34%

57%65%

89%

54%

78%

0%

20%

40%

60%

80%

100%

Bank IBD Insurance NFS Regional RIA All Advisors

Commission-based Fee and commission mix Fee-based

29

Client Net Worth, 2005-2007

Client Net Worth Range

IBD Wirehouse Regional RIA

2005 2007 2005 2007 2005 2007 2005 2007

> $25m 1.2% 0.5% 0.8% 1.7% 3.0% 0.5% 2.4% 4.5%

$10m-$25m

0.8% 1.3% 3.0% 3.9% 3.3% 8.7% 5.5% 5.4%

$1m-$10m

16.6% 22.3% 21.5% 33.1%20.2%

29.7%

44.2% 42.5%

$250k-$1m

40.4% 43.2% 44.3% 41.3%44.3%

34.9%

34.2% 33.9%

< $250k41.1% 32.7% 30.5% 20.1%

29.2%

26.2%

13.7% 13.7%


Managed accounts are aiding other channels in delivering advice to$1m-$10m clients…

30

Advisors are Strapped for Time; Outsourcing Asset Mgt to Experts is a Better Approach for Most

Client meetings30%

Compliance9%

Research8%

Training7%

Client service problems

12%

Other1%

Client acquisition15%

Administration6%

Asset Mgt/ Trading7%

Operations5%


Advisors’ Time Allocation, 2007

Managed accounts address advisors’ needs and facilitate planning-oriented relationships

31

Portfolio Construction, a Growing Challenge

Strategies That Would Ease the Portfolio Construction Process, 2007

Advisors are becoming overwhelmed and looking for assistance

Source: Cerulli Associates, Advanced Sales Corporation

34% 33% 33%

24% 24%

15%13%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Home-office

support

Working in a

team with

other advisors

Outsource Additional

training

Access to

research

specialists

Nothing Designations or

education

32

Retirement Income: Consumers Are Biggest Obstacle

25%

21%

17%

12%

12%

12%

9%

9%

6%

56%

52%

49%

46%

45%

38%

43%

40%

30%

33%

19%

28%

34%

42%

43%

50%

48%

52%

64%

61%6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Lack of consumer awareness

Very time consuming

Product complexity

Client resistance

Lack of planning assistance

Lack of technology

Lack of product offering

Lack of home-office support/ resources

Lack of training or designations

Unable to garner significant compensation

Major obstacle Somewhat of an obstacle Not an obstacle

All Advisor Comparison: Obstacles to Retirement Income Planning, 2007

Retirees could be shocked when looking to create income streams


33

?

Advisors looking more like RIAs

Easing portfolio construction for advisors

Taking advantage of next-generation programs

Recap and Questions


34

Industry Outlook

35

24%

25%

36%

37%

42%

51%

60%

42%

43%

39%

42%

43%

35%

24%

33%

26%

22%

15%

14%

16%

35%

0% 20% 40% 60% 80% 100%

Asset managers and asset allocation are determined by the

broker/ dealer or third party

Advisor manages a portfolio of stocks or ETFs for clients

Recommendations are made by your B/ D or third party, but the

advisor can adjust those recommendations

Use separate accounts

Advisor determines asset managers and asset allocation

Use mutual funds

Allow the advisor to use a wide range of vehicles

Most desirable Somewhat desirable Least desirable

Managed Accounts: Fueling the growth of fees

All Advisor Comparison: Advisor Opinion of Managed Account Types, 2007


36

Portfolio Construction Tug of War

PORTFOLIO CONSTRUCTION DISCRETION

Sponsor AdvisorAsset Managers

Regardless of who controls, the asset manager has a vested interest

More scalable/consistent

More discipline Value proposition

That’s what teams are forMore time/dedication


Customization

37

22%17%

91%

52%

13%

0%

20%

40%

60%

80%

100%

Performance (given it is

good enough to clear

screen)

Value-added

materials/ services

Wide range of

investment styles

Seasoned wholesalers Embedded-advice

(retirement income

vehicles, lifecycle, MSA)

Ongoing Shift to Consultative Approach


Is demand for value-added services more than lip service?

Sponsors' Greatest Needs from Asset Managers, 2007

38

69% 65%

48% 42%31% 27% 24% 24%

27% 31%

48% 54%69%

65% 72%60%

0%

20%

40%

60%

80%

100%

Advisor

practice

management

Advisor

investment

education

Advanced

planning

topics

Competitive

analysis

Client

investment

education

Social events Advisor

prospecting

materials

Client

seminars

Highly effective Somewhat effective Not effective

Most Effective Types of Marketing with Advisors

Practice management resonates with advisors


39

42% 43%

8%

3% 4%

20%

36%

16%17%11%

0%

10%

20%

30%

40%

50%

≤5 6-10 11-15 16-20 >20

Wholesalers Advisors

Differences in Experience Are a Hurdle


Are the young pups going to teach the old dogs some new tricks?

Years of Experience in Position for Wholesalers and Advisors, 2007

40

Overlay Pitfalls


Presentation to client Change goal dialogue

Performance and overlay functionality

Communication

Sales/Wholesaling Engage asset manager

Challenge Suggestion

41

Segment 2006 2007E 2008E 2009E 2010E 2011E

Separate account programs $747 $857 $934 $1,008 $1,049 $1,035

Growth rate 14.6% 9.0% 8.0% 4.1% (1.4%)

Mutual fund advisory programs $403 $559 $689 $825 $970 $1,127

Growth rate 38.8% 23.2% 19.8% 17.5% 16.3%

Rep-as-portfolio-manager programs $183 $243 $293 $348 $407 $468

Growth rate 33.1% 20.4% 18.9% 16.8% 15.1%

Rep-as-advisor programs $95 $215 $301 $396 $484 $577

Growth rate 127.7% 39.9% 31.4% 22.2% 19.2%

Fee-based brokerage programs $276 N/A N/A N/A N/A N/A

Growth rate N/A N/A N/A N/A N/A

Unified managed account programs $27 $49 $85 $135 $182 $233

Growth rate 79.2% 72.5% 59.3% 35.0% 27.8%

Total managed accounts $1,731 $1,923 $2,301 $2,713 $3,091 $3,434

Growth rate 11.1% 19.6% 17.9% 14.0% 11.3%


Managed Accounts Projections

Managed account assets should surpass $3 trillion in 2010

42

Developments on the Horizon

• Mutual fund share class debate

• Opportunities for private client groups/trust departments and insurance broker/dealers

• Guaranteed sleeves within managed account programs to supplement retirement income solutions

43

?

Advisor adoption of UMAs

Projections

Where is the opportunity?

Recap and Questions

44

Summary

Managed accounts growth has been strong across all channels, and across different types of programs

Continued growth depends on firms continuing to adapt platforms to their advisors

Managed accounts are leveling the playing field for advice providers

More competition between channels/firms/advisors – differentiation critical

Overlay management and UMAs are the path to creating better client solutions

Progress must be pursued with focus on client and process, not product

45

Further Information

www.cerulli.com

Jeff StrangeSenior Analyst

(617) 437-1098 [email protected]

Marketing and Business Development

(617) [email protected]

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