The Advisory Industry Today & What s s Ahead. Rebecca Pomering CEO, Moss Adams Wealth Advisors

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1 The Advisory Industry Today & What s s Ahead Rebecca Pomering CEO, Moss Adams Wealth Advisors

2 Where Are We? Impressive year-over-year growth Margin compression (not fee compression) Big money to be made Advisors and clients aging Interesting evolution of advisory firms and client service experiences

3 Advisor Industry Growth 30% Year Over Year Growth in AUM 25% 20% 15% 25.3% 20.3% 22.7% 18.5% 10% 5% 0% Source: Moss Adams LLP Financial Performance Study of Advisory Firms

4 Rewards Grow With Revenue Rewards Increase for Owners as Firms Grow Pre-Tax Income per Owner $1,000,000 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 $936,064 $8,000,000 $7,340,500 $7,000,000 $6,000,000 $540,611 $5,000,000 $4,000,000 $3,028,000 $3,000,000 $229,698 $252,124 $2,000,000 $113,350 $927,400 $1,000,000 $519,789 $222,500 $0 Early Solos Mature Solos Early Ensembles Mature EnsemblesMarket Dominators Revenue Pre-tax Income per Owner Revenue

5 CPA WM Divisions Smaller, But Growing Even Faster $500,000 Average Revenue $400,000 $300,000 $200,000 $100,000 $254, % $342, % $462,011 $ Fiscal Year Source: 2007 CPA Financial Planning Practice Study, Moss Adams LLP and AICPA

6 Cost to Deliver on the Rise Direct Expenses Professional compensation More services being delivered for the same fee Overhead Expenses Technology Compliance Support staff Technical specialists For most firms, fees not keeping pace

7 What s Ahead? Continued growth More competition Evolution of business model Shifts in advice model Professional management Acute talent shortage CPA firms uniquely positioned

8 AUM Opportunity Of $53 trillion in worldwide assets, $26 trillion is based in the U.S. U.S. Share of Global Assets Under Management Rest of World 52% United States 48% Source: Boston Consulting Group, 2007

9 High Net Worth Individuals Nearly one-third of world s population with more than $1 million in financial assets (HNWI) resides in U.S. North America accounts for 30% of the world s $37 trillion in HNWI wealth Asia- Pacific, $8.4 HNWI Wealth Distribution Latin America, $5.1 Middle East, $1.4 Africa, $0.9 In Trillions Europe, $10.1 North America, $11.3 Source: Merrill Lynch/Cap Gemini, 2007

10 Growth Projected to Continue Historical and Projected Total Investable Assets, U.S. Households, Inflation-Adjusted, $Trillions Note: Liquid financial assets adjusted for inflation to current 2006 dollars Sources: Moss Adams LLP, Federal Reserve, U.S. Dept. of Labor

11 Demand for Advice Will Drive Continued Growth $53 trillion in U.S. household net wealth $26 trillion in U.S. investable assets Investable assets have tripled in the past 25 years Over next five years assets are expected to grow another $5 trillion Translates into revenue opportunity of $35 billion by 2012 Source: Boston Consulting Group, 2007

12 How Will You Compete and SELL? (ssshhhhhh ) Selling has become a dirty word Most practices are over-reliant on passive referrals Asking for referrals or going for the close has become unseemly Many emerging advisors thrust into rainmaking too late in career

13 Where Are New Assets Coming From? Percentage of New Asset Growth 20% 16% 12% 8% 4% 0% -4% -8% 14.1% New Clients 6.9% 6.3% New Assets from Existing Clients -2.9% -2.8% Performance Lost Clients Distributions Source: 2006 Moss Adams Financial Performance Study of Advisory Firms, Sponsored by JPMorgan Asset Management and SEI Advisor Network.

14 Refer Madness Percent of New Client by Business Development Method 65% Referrals (all types) Other sources 14% 4% 17% External business development efforts of the owners External business of non-owner development efforts professionals Source: Moss Adams LLP, 2006 Financial Performance Study of Advisory Firms, Sponsored by JPMorgan Asset Management and SEI Advisor Network.

15 Transition Across Industry Yesterday s Advisor Investment-centric Managing money Accumulating wealth Generating return Doing it yourself Financial planning Technical advice Today s/tomorrow s Advisor Client-centric Managing risk Preserving wealth, hedging inflation, minimizing taxes Balancing cash flows Leveraging specialists and strategic partners Life planning Technical and emotional advice

16 Advice Shifting Shift from accumulation to de-accumulation, not just distribution Advising clients on new issues: Lifestyle Downsizing Income management Part-time working Aging worker issues/benefits Family/intergenerational issues

17 Service Offering Shifting Investment management becomes less relevant Required knowledge of new solutions focused on distribution and income producing assets Taxes and tax planning become more important Bill payment, tax prep, and health care services more in demand

18 Relationship Shifting Emphasis shifts from technical issues to personal issues Frequency of contact can increase rather than decline New stakeholders may enter the relationship children and relatives If clients relocate can you manage the relationship remotely?

19 Pricing Shifting Pricing will change To better reflect practice economics To better communicate the value of the offering Pricing methods will blur

20 Fee-Based Revenue on the Rise Fee-Based Revenue vs. All Other Revenue Percentage of Total Revenue 100% 80% 60% 40% 20% 0% 48% 52% 23% 77% Year Fee-Based Revenue All Other Revenue Source: 2006 Moss Adams LLP Financial Performance Study of Advisory Firms

21 The Advisor Role Smoosh What will be the implications of growth on your role in the business? Client caretaker vs. growing business management needs Are business owners comfortable giving up their traditional roles? Are they comfortable handing over the business management to other experts who have the skills? What are the implications of not making these decisions on growth? On clients?

22 Professional Management Complexity and size causing a move to professional management for: Strategy Implementation Financial Management Human Capital Operations

23 Professional Management Allows Large Firms to Leverage Percent of Firms 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Prevalence of Dedicated Management Staff by Firm Size 7% 15% $250K $250K - $500K 24% $500K - $1M 38% 54% 74% $1M-$2M $2M-$3M $3M-$5M 89% >$5M Firm Size by Revenue Source:2006 Moss Adams Financial Performance Study of Advisory Firms, Sponsored by JPMorgan Asset Management and SEI Advisor Network.

24 Acute Talent Shortage By 2011 there will be 10 million more jobs than people

25 Acute Talent Shortage The industry is going to have to commit to recruiting, developing and training newcomers. The cost of good people is going up. The path will be different than in the past.

26 CPA Firms Are Uniquely Positioned Favorable positioning in the growing advice market CPAs are the most trusted advisors Ahead of attorneys, bankers, and other professionals Trust is overwhelmingly the top characteristic clients look for and expect in their advisor Existing client base and market presence Tax and accounting knowledge of growing importance in the overall planning process Source: 2007 CPA Financial Planning Practice Study, Moss Adams LLP and AICPA

27 Motivations Behind Offering Advice Respond to client needs Build upon existing relationships Diversify the service offering of the overall firm Increase revenue and profitability Source: 2007 CPA Financial Planning Practice Study, Moss Adams LLP and AICPA

28 Opportunity Creates Challenges for CPAs as Well 52% of CPA firms indicated challenges integrating the financial planning/advisory offering Central challenges include: Allocating resources Compliance Gaining access to clients Lack of support from other partners Source: 2007 CPA Financial Planning Practice Study, Moss Adams LLP and AICPA

29 Keys to Success Apply strategic approach to the wealth advisor business Define target clients Commit resources Monitor the performance of the business Set sales and growth goals by office, group, individual Formalize the compensation system Compensate for results Devote time and resources to marketing/ communication Source: 2007 CPA Financial Planning Practice Study, Moss Adams LLP and AICPA

30 AICPA Moss-Adams CPA Financial Planning Study First study of CPA financial planning & investment advisory practices Based on detailed information provided by 431 practices

31 Moss Adams Annual Advisor Studies compstaffing.aspx financialperformance.aspx