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1 --- FOR IMMEDIATE RELEASE --- TIBURON RELEASES UPDATED VERSION OF ITS COMPREHENSIVE REPORT ON FEE- ACCOUNTS, TURNKEY ASSET MANAGEMENT PROGRAMS (TAMPs), & THE BOOMING SEPARATELY MANAGED ACCOUNTS MARKET -- Report reveals Tiburon s predictions for the future of the fee-accounts, TAMPs, & separately managed accounts market, including expected product innovations, expected process improvements, and emerging distribution opportunities -- TIBURON, CA, February 15, Tiburon Strategic Advisors, a research-based strategic consulting firm serving the brokerage and investment management industry, recently released an updated version of its research report on fee-accounts, turnkey asset management programs (TAMPs), & the booming separately managed accounts market. In this release, Tiburon reveals its predictions for the future of the fee-accounts, TAMPs, & separately managed accounts market including expected product innovations, expected process improvements, and emerging distribution opportunities. Expected Product Innovations On the product side, Tiburon expects to see innovations in multiple areas: Multiple Discipline Accounts Additional Investment Vehicles - Package Products - Alternative Investments - Sub-Advisory Models - Insurance Packaging Unified Managed Accounts Revised Pricing Models - Retainers - Commission Models - Unbundled Offers Wealth Management Services Let s take a look at each of these individually. Get out your crystal ball! Multi-Discipline Accounts (MDAs) Multiple discipline accounts may have been the single most important innovation in this market since its beginning, partly for the product they are and partly because of the trend they establish. MDAs were the big innovation in Trademarked by Citigroup in 1997, MDAs package together more than one investment style to create diversified portfolios with low fees and minimums. These products maintain the typical $100,000 minimums and are targeted primarily at the same market as mutual fund wrap accounts. Separate account managers do not buy individual stocks but rather build portfolios and send trades to an overlay manager who coordinates the buys and sells in the account. This eliminates almost all manual tasks, reduces administrative costs, and eliminates many start up costs. Citigroup Asset Management pioneered the MDA and had significant success selling it through Smith Barney. Citigroup is now attempting to sell it through third-parties. At the same time, Smith Barney, Morgan Stanley, and others rolled out the first MDAs that utilized third-party managers. Multiple discipline accounts maintain all of the advantages of traditional separate accounts: 1

2 Hold individual securities Some customization can be accommodated Tax optimized (maybe better than traditional separate accounts) Cost effective However, multiple discipline accounts also have a variety of advantages over traditional separate accounts as well as mutual fund wrap accounts: Simplicity which appeals to both asset gatherers and clients One contract to sign One account number Pre-selected managers One monthly statement that consolidates all positions One quarterly performance report with one investment benchmark Consistent investment commentary Appropriate diversification at lower minimums ($100,000 total) Helps solve the dilemma for smaller accounts Improved tax management duplicate positions or inverse trades MDAs may soon be customizable. Presently only off-the-rack asset allocations are offered. The goal is completely customized portfolios. In fact, MDAs have already evolved through three generations: Predefined models with single proprietary managers: Introduced in 1999, these programs lack any thirdparty managers, multiple managers, or customization ability Predefined models using single thirdparty managers: Introduced in 2001, these programs started using thirdparty managers but still just one manager and they were not customizable MDAs Have Already Evolved Trough Three Generations; the Dynamic Customizable Models Will be the Ultimate Product Design Approximate Dates Dynamic Models Multiple Managers Third-Party Managers Source: Multiple Discipline Account Generations Predefined models with single proprietary managers Predefined models using single third-party managers 9/30/02 AdvisorPort Presentation (DeAngelis); Tiburon Research & Analysis Predefined models using multiple thirdparty managers Dynamic models using multiple thirdparty managers Tiburon Strategic Advisors, LLC Predefined models using multiple third-party managers: Introduced in 2002, these programs now use multiple third-party managers but are not yet customizable MDAs will likely continue to gain steam over the coming years. Tiburon expects to see many new entrants and for mid-sized players to pull the overlay process in-house. The key successes thus far have only been proprietary products in proprietary channels (e.g., Smith Barney and Merrill Lynch) but Tiburon believes that the dynamic customizable models will be the ultimate product design; these should come in The entire MDA market will likely grow quickly to $55 billion in assets by 2004 and $250 billion by By 2004, MDA annual sales may be $50 billion annually, accounting for 25% of all separately managed account sales. Additional Investment Vehicles Tiburon expects that a variety of new investment vehicles will emerge in the fee-accounts market. Specifically Tiburon expects to see mutual fund wraps expand the packaged product model with a growing use of index funds, exchange traded funds, annuities, and other products. And Tiburon

3 expects separately managed account programs to add alternative investments, including hedge funds, venture capital & private equity funds, real estate funds, and other more sophisticated products. Tiburon also expects the sub-advisory model to grow and expects to see innovations in insurance packaging. Packaged Products One key step forward Tiburon believes will be the addition of other investment vehicles into the feeaccount format. There is no reason why index funds, ETFs, and annuities can not be placed into feeaccount models the same way as mutual funds are. Also, designing these alternative models might make fee-accounts more desirable for customers who are looking for an annuity product, for example, but at the same time desire the fee-account structure. For these customers, wrapping some of these specialty products will be a key innovation. Watch for index fund wraps, annuity wraps, etc Some firms have already worked on these packaged product innovations. For instance, Assante, BAM, and LPL all offer index fund wraps. AdvisorPort, AG Edwards, and Lockwood all offer ETF wraps. And AssetMark and GE Private Asset Management have already wrapped annuities. Alternative Investments As consumers begin to look for hedge funds, venture capital & private equity funds, and real estate funds, program sponsors have a great opportunity to place some of these managers on their separate account manager lists as additional choices. There are some turnkey asset management programs that are trying to move in this direction already. In the near-term, watch especially for the inclusion of hedge fund managers! Sub-Advisory Models Another growing fee-account model is the sub-advisory model. Several leading fee-account programs like those of Assante, Frank Russell, SEI, and UBS PaineWebber utilized the sub-advised model. SEI has all their funds sub-advised and is setting the pricing umbrella both to the retail market and to the money managers. The average expense ratio for SEI funds is 75 basis points; SEI s equity funds range from 90 to 110 basis points. The sub-advisors only get 30 to 50 basis points depending on the funds. UBS PaineWebber s PACE Portfolio program is also an innovative offering. In fact, UBS PaineWebber abandoned the majority of its proprietary mutual funds (only kept 6 of 24) The Share of Mutual Fund Sales Captured by Sub-Advised Funds is Expected to Increase and repositioned its program to capitalize on the best managers. Sub-advising is growing more broadly. About ten percent of mutual funds are sub-advised (704 of 6,700 funds). And these funds are gaining more than their share of net new assets. Sixteen percent of new mutual fund sales go to sub-advised funds. And this may be just the beginning. The share of mutual fund sales captured by sub-advised funds is expected to increase. One source suggested that today s 16% may increase to 25% by By way of perspective, it is interesting to note that 93% of annuity assets are sub- 16% te: In the variable annuity industry, 93% of dollars are sub-advised Source: 10/16/02 Wall Street Journal (FRC); Tiburon Research & Analysis Mutual Fund Sales by Type of Mutual Fund Management 25% Tiburon Strategic Advisors, LLC 3

4 advised. Insurance Packaging Insurance packaging is coming. Tiburon expects that across fee-account products (as well as non-fee products), product development departments at both investment and insurance companies will soon come to see insurance as a wrapper which can be sometimes advantageously put around any type of investment vehicle. So look soon for the insurance wrapper option of leading separately managed account and mutual fund wrap programs. Unified Managed Accounts (UMAs) The ultimate end game should be an open fee platform called a Unified Managed Account, allowing assets to be priced individually. The idea here is that there is no reason why investors should have to have different accounts for various assets they own. Why can t an investor have several separate account managers, some mutual funds, and even some individual securities in the same account? Many firms have long delivered custom UMAs for their wealthiest clients (and a few like Morgan Stanley may be ready to roll out a mass customized offering): We do in our private bank for really wealthy clients; it is manual We do custom reporting, blending mutual funds and separate accounts for our wealthiest clients Do for $5 million+ accounts Revised Pricing Models Tiburon expects a variety of innovative pricing models to emerge in the near future, including: Retainers Commission Models Unbundled Offers Retainers Retainer fees may be the next pricing revolution. Although the fee-accounts business grew over an extended 20 year period, it seems that little thought has been given to its core economics. Few firms have broken any molds and the industry has grown accustomed to the pricing schedules that exist today. Tiburon could easily see fees based on assets being at least partially displaced by retainers. Retainers work better for clients whose needs are broader than investments and with the aging of the baby boomer population this is a likely evolution of the business. At the same time, some argue that asset-based fees (like commissions before them) can cause conflicts of interest. For instance, diversifying into real estate or making a larger than needed home down payment may be discouraged by an advisor collecting an asset-based fee. Retainer fees would likely benefit larger clients; they could endear the firm which does so to the high net worth client. Commission Models Oddly, given that this industry is the fee-accounts industry, Tiburon also expects to see some reemergence of commission models and the blending of fee and commission models. For instance, the industry may see some fee-account programs with contingent deferred sales charges. These models, which might include deferred sales charges of 3.00%, 2.00%, and 1.00% over three years, may appeal to transitioning brokers and be well-positioned for clients not fully committed to a fee-accounts program. Broker financing in the movement to fees may also help. 4

5 Unbundled Offers The third key pricing innovation in this area may be some unbundled models. There are three possible innovations here: First, the industry seems to have finally come to realize that the investment consulting process is right for nearly everyone; products should be interchangeable but the process makes sense Second, some of the services traditionally included in fee-accounts could be unbundled and sold separately. For instance, it seems obvious that the first two services, client profiling & asset allocation and investment selection, need to be bundled, but the ongoing relationship and reallocation and quarterly performance reporting services that the industry takes for granted as being part of a wrap could easily be unbundled for pricing purposes Others talk of presenting unbundled money management, custody, and clearing fees. In proprietary programs, the costs for the advisor, money manager, custody & clearing, and administration are all grouped. Unbundling these for presentation may make sense. Unbundling the trading costs may also make sense for some client who are subsidizing others. Many firms unbundle on a case-by-case basis. Wealth Management Services Finally, Tiburon believes that at some point, firms will come out with what could be called a Wealth Account. This would be an account that bundles the fees for various wealth management services, such as tax planning, insurance planning, estate planning, and the like into one account along with investment management. That way the customer would be able to get all their services in one place and in one bundled fee structure. Many industry participant thought highly of this (and at least one, in Legg Mason, already seems to be executing): Private banking services are key Like that model; it could have legs We have had a wealth management initiative for a couple of years At the end of the day, the industry may end up with an investment consulting process wrapping many investment vehicles. For low-end customers, mutual funds, ETFs, and annuities may be the core products. For midsize clients, institutional mutual funds and MDAs may be the investment vehicle of choice. Higher net worth clients may demand separate accounts and alternative investments. And the truly affluent may get institutional investment consulting, insurance packaging, and wealth management services. The good news for consumers is that all would be wrapped in the investment consulting process. So there you have it; it is an exciting time in the fee-accounts industry. At the End of the Day, We May End Up with an Investment Consulting Process Wrapping Many Investment Vehicles Frankly, from afar it seems like the fee-accounts industry has not yet seen a lot of innovation. However, as the independent advisor markets grow and the discount brokers try to move up market, watch out! The good news for everyone is that the investment consulting process is being applied more broadly. Expected Process Improvements On the process side, Tiburon expects to finally see some innovation across three areas: Source: Investment Consulting Process 9/10/02 Financial Advisor; Tiburon Research & Analysis Ultimate End-Game Wealth Management Insurance Packaging Institutional Investment Consulting Alternative Investments Separate Accounts MDAs Institutional Mutual Funds Mutual Funds, ETFs, & Annuities Investment Consulting Process Tiburon Strategic Advisors, LLC 5

6 Front-End Technology Manager Selection Back-End Technology These innovations will better leverage resources and deliver more value to clients. The back-end innovations may also help maintain profitability in this business. Front-End Technology Front-end innovations have recently been rapid. The best innovations seem to be coming from the platform-oriented TAMPs and some other business enablers. For instance: There have been some solid steps forward in client profiling and asset allocation; Monte Carlo Simulation, for instance, is a good step forward in helping clients to better understand risk Online proposal systems have been a big step forward in efficiency; gone are the days of waiting 7-10 days for the program sponsor to deliver a proposal Improved tax treatment has been a big focus in with terrific steps forward by Parametric, Placemark, Tamarac, and others Performance reporting on demand has also been an excellent step forward; clients are now able to see their year-to-date performance at any time In short, the industry has made some substantial strides in front-end technology over the past few years. While there is still more to come, this may now be the strength in the fee-account process. Manager Selection Manager selection processes are getting more impressive, led by innovations by firms such as Greenrock Research and Prima Capital. Traditional manager selection methods may have been too simplistic. First, high net worth clients have different needs than institutional clients; a variety of factors are critical such as tax-efficiency and the ability to create a concentrated portfolio due to smaller account sizes. Beyond this, manager due diligence teams are also deepening their analysis: New formulas Holdings-based analysis Getting into attribution analysis In short, Tiburon suspect that there are still innovations to come in manager selection. Firms such as Prima Capital and Greenrock Research, that are focused on the high net worth market, may be leaders. Back-End Technology Back-end technology innovations may be the most startling in the industry over the coming years. Today, separately managed account systems are like railroads all having different gauges. At least three movements are underway in this respect: The firms that cleaned up the mess in operations and technology in the mutual funds business in the 1970s are entering the separate accounts business. Firms such as Bank of New York, DST, PFPC, and State Street are all, in some way, making moves into this market E*MAT believes it has the solution. The firm is promoting a common operational platform to improve efficiency in custody and trading. The firm pitches that the industry will soon be able to produce MAVs or managed account values Finally, the folio companies, like Foliofn, believe that traditional separately managed account platforms don t meet today s needs and that their technology is the solution 6

7 In any case, traditional sponsors will lose their grip on concentricity. Mutual fund companies entering the business are unlikely to wait in line or deploy second rate technology. Operations and technology services will be further unbundled from the separate account product, the wirehouses will lose their grip on concentricity (and at the same time aggressively pitch their platforms to third-parties), and the fee-accounts back-office will be a growing area for venture capital investments. Emerging Distribution Opportunities Tiburon believes that managers have a wide variety of distribution options, each with different pros and cons; these options include: Wirehouses - Core Business - Second-Tier Programs - Second-Tier Reps Regional Broker/Dealers Boutique Brokers Independent Advisor Markets - Independent Broker/Dealers - Turnkey Asset Management Programs - Fee-Only Financial Advisors Other Opportunities - B2C Models - Other Potential Domestic Markets - International Opportunities Wirehouses The wirehouses have long dominated distribution of fee-accounts, especially in separately managed accounts. As noted in Tiburon s latest report, wirehouses control 60% of all fee-account assets and 76% of separately managed account assets. Core Business However, the wirehouse market is difficult to play in because a handful of brokers control distribution and the firms demand substantial resources. The firms demand huge commitments to marketing and substantial wholesaler forces. Firms such as Anchor, Golden, and Rorer are complimented for their wholesaling efforts but others find that they need to claw their way into the wirehouses core businesses. Wirehouses also drive the fees down the lowest and the wirehouses dominance will likely fall to 50% by In any case, the core programs of the wirehouses are a difficult market for new managers but also a difficult one to ignore. However, 90-95% of AUM Go Into the Top Programs Asset Flows in Separate Account Wrap Programs Versus Tier Two Manager Universes Tier Two Programs 5% Second-Tier Programs Separate account managers may want to get into the dual contract business first and prove themselves if that is all that is available. The dual contract businesses of most firms allow Source: 2/7/02 Prudential Presentation (Kinne); Tiburon Research & Analysis Tier One Programs 95% Tiburon Strategic Advisors, LLC 7

8 managers to set their own pricing and determine their own investment in distribution. The objectives of a manager taking this course should include: Proving that they can drive sales Building relationships and a following Gaining operational experience Following advisors who move firms These programs are referred to as the minor leagues and generally include seven times as many managers. On the other hand, managers will not invite in second-tier managers for branch presentations and back office and marketing muscle will not be given. And it is important to note that 90-95% of asset flows go into the top-tier programs. Second-Tier Reps Separate account managers can also invest in educating the second-tier of wirehouse reps. The wirehouses need to teach their second-tier of advisors but with budget cuts they will look to managers for help. Separate account managers can build long-term advisor relationships and earn goodwill of program sponsors through this strategy. Regional Broker/Dealers The regional broker/dealers like AG Edwards and Wachovia have more realistic needs. Some managers new to separately managed accounts may want to start by targeting these systems. These firms generally follow the wirehouses and participate in a group called the Asset Consulting Roundtable to share ideas amongst themselves. They generally lack resources and look even more to the managers for help. Boutique Brokers The boutique brokers may have more manageable networks. For instance, firms like Goldman Sachs or Lehman Brokers may have top producing advisors in just 5-10 offices. This is another possible starting place for managers new to separately managed accounts. Independent Advisor Markets Tiburon believes that the greatest upside though may be in the booming independent advisor channels. There are a variety of methods to reach the booming independent advisor channels, including: Independent Broker/Dealers Turnkey Asset Management Programs Fee-Only Financial Advisors There are also related opportunities in places such as semi-independent networks (e.g., Profit Formula), custodians (e.g., Schwab), and clearing brokers (e.g., National Financial or Pershing). Independent Broker/Dealers Independent broker/dealers have traditionally relied on the TAMP programs, but many are now leveraging the platform-oriented TAMPs to develop private labeled programs. This opens up terrific new distribution opportunities for managers. For instance, as Tiburon s latest report went to print in late 2002, leading independent broker/dealer conglomerates AIG Advisor Group and ING Group had both announced plans to build private labeled programs. Turnkey Asset Management Programs 8

9 The best distribution opportunities may be the TAMPs, platforms, and marketplaces to reach the independent advisors. Tiburon expects the TAMPs market to grow substantially due to new entrants into the fee-accounts market. Currently the TAMPs market has about $89 billion in assets under management. Tiburon believes that this number will steadily increase to almost $300 billion by Fee-Only Financial Advisors 78 Reaching fee-only financial advisors on a one-off basis is difficult because of their size and dispersion. At the same time, just 7% of fee-only financial advisors utilize TAMPs Source: 8/2/01 RunMoney Conversation (Jorgensen); 7/17/01 RunMoney Conversation (Jorgensen); Tiburon Research & Analysis Fee-only financial advisors often work in one Tiburon Strategic Advisors, LLC partner offices whereas wirehouses can have up to 90 producers in an office, making it easier for wholesalers. At the same time, fee-only financial advisors have not, as a group, bought into the advantages of separate accounts and many are expanding their practices into wealth management services instead of focusing on more sophisticated investment solutions. To serve this market, marketing (not sales) and patience are required. Other Opportunities There are a few other opportunities to consider: B2C models Other potential domestic opportunities International opportunities B2C Models The first round of the B2C model failed. Firms like RunMoney and My Money Pro did not find a market and quickly evolved into platform-oriented TAMPs. That said, Tiburon does expect to see some return of the B2C model over time (in a slightly different format led by the leading discount brokers). Schwab, Fidelity, and E*Trade are all likely to innovate in this area. All will continue down Fidelity s existing path and offer models including some help and advice limited by centralized service or other pricing models. The industry may also even see a free online mutual fund wrap account. Most likely, the first company to offer a product like this will be a mutual fund company or discount broker. The economics will be around driving assets into proprietary funds and/or collecting subaccounting fees from third-party funds. Other Potential Domestic Opportunities There are some other potential markets for separately managed accounts, including: 401k Plans Variable Annuities and Variable Life Policies 401k Plans 401K plans may be a new channel. Tiburon would not be surprised to see 401k plans adopt individual manager options. Variable Annuities & Variable Life Policies Tiburon Expects the TAMP Market to Grow Substantially Due to New Entrants Into the Fee-Account Market 89 Assets Under Management ($ Billions)

10 VAs/VLs may be a new channel for separate accounts. As noted earlier, managers may simply become available within or outside of insurance policies. International Opportunities There are numerous potential international opportunities as well. Specifically, Tiburon expects growth in separately managed accounts outside of the US. Disintermediation will drive demand for investment management services in Europe, Asia, and Latin America. A few international entrants are already TAMP users: Royal Bank of Canada previously had used Lockwood and recently purchased platformoriented TAMP Separate Account Solutions Bank of va Scotia uses EnvestnetPMC Caldwell Securities (a small Toronto-based brokerage firm) is launching a fee-accounts program and considering both Lockwood and Frank Russell So there you have it. Tiburon expects substantial product and process innovations, and expects a wide variety of distribution opportunities to emerge for fee-accounts broadly and most specifically for separately managed accounts. Over the mid-term watch the independent advisor channels and the international markets. Good luck! 10

11 Tiburon Strategic Advisors Tiburon Strategic Advisors, based in Tiburon, CA, was formed in 1998 to offer research-based strategic consulting and other related services to financial institutions and investment managers. The firm has served almost 200 corporate clients and completed over 400 research and strategic planning projects in that period. The firm s knowledge base ranges from mutual fund distribution, to separately managed account programs, alternative investments, wealth management, the fee-only financial advisor market, the CPA firm market, and advisor best practices. Tiburon tries to make its research widely available at reasonable prices. For instance, its comprehensive research on this topic can be accessed in at least three ways: Tiburon Research Report The most economical method to access this research is to purchase the Tiburon Research Report, which in this case is a 300-page report, with over 250 updated charts and graphs. Tiburon Research Reports cost just $1,000. Tiburon Market Seminars For firms which want to discuss the implications of this research, Tiburon consultants can present a seminar, many of which are used for board meetings, strategic planning sessions, and management offsites. In this case, a seminar could include any of the 2,000+ pages of Tiburon findings. Two Tiburon consultants conduct each market seminar and seminars cost $8,500 plus travel expenses. Tiburon Conference Speeches Tiburon executives are well-known conference speakers and this research could be summarized into an informative presentation for executives of firms attempting to compete in the fee-accounts, TAMPs, and/or separately managed accounts markets. This material is also utilized by Tiburon to speak at many program sponsors conferences for their advisors; in this case, Tiburon is able to give the advisors an excellent summary of the market and likely developments. Tiburon Conference Speeches are $8,500 plus travel expenses for Tiburon s Managing Principal; other Tiburon speakers are also available at lower rates. CONTACT: Krista Jenssen at Tiburon Strategic Advisors at KJenssen@TiburonAdvisors.com or (415)