THE CERULLI REPORT. RIA Marketplace 2013 The Changing Landscape of a Maturing Industry LOOK INSIDE TO PURCHASE. Overview. Benefits

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1 THE CERULLI REPORT RIA Marketplace 2013 The Changing Landscape of a Maturing Industry Overview This annual report, in its third iteration, provides focused coverage on retail registered investment advisors (RIAs) and leverages Cerulli's decade-long coverage of this growing channel. In addition to Cerulli's industry-leading market sizing and segmentation, the report covers the profile of RIA practices, portfolios, and product use, and drivers of growth. This report analyzes findings from two proprietary surveys: Cerulli s long-running Advisor Survey and RIA Custodians Survey. Benefits Build actionable business plans to address opportunities within the segment Profile how RIA firms differ by segment Analyze the sources of growth in the RIA channel Understand the product landscape, including product and portfolio construction trends Review key developments in the delivery of advice and how RIAs are positioned Examine which services RIAs are delivering to their clients Explore mega RIA firms Questions Answered Can independent broker/dealers retain large, fee-based advisory firms? Which custodial relationships are essential for asset managers to reach RIAs? How has the breakaway broker impacted the growth of the RIA channel? What are other sources of growth for the RIA channel? How does the makeup and structure of a RIA firm change based on its assets under management? What is the outlook for dual registration? How do RIA firms service clients? What support do RIAs need when constructing portfolios? How prevalent are tactical allocation and passive investments among RIAs? What are the trends in RIA mergers and acquisitions? The Cerulli Report 13 THE CERULLI REPORT TO PURCHASE CALL info@cerulli.com VISIT HAVE US CONTACT YOU: Subscription Information $13,000 SPECIAL REPORT Hardcopy Softcopy in color Unlimited online firm-wide access Exhibits in Excel Key Findings Analyst support LOOK INSIDE 7 pages of report content attached 128 pages, 89 exhibits

2 Table of Contents Expanded Table of Contents - Expanded Key Questions Answered What types of RIA practices are experiencing the most growth? What factors are affecting investor choices in the financial advice market? What product are RIAs most interested in adding to their portfolios? Which RIAs are experiencing the most success in the high-net-worth (HNW) marketplace?...17 Chapter 1: The A is for Advisor...18 Identifying Preferences...18 Exhibit Investors' Importance of Fiduciary Obligation by Investable Assets, Exhibit Most Difficult Part of Working with Financial Advisors by Household Age Range, Comprehensive Consultants...21 Exhibit Factors Rated Extremely Important in Choosing an Advisor by Household Age Range, Exhibit Advisor Perceived vs. Actual Practice Type, Exhibit Advisor Practice Type by Channel, Broadening the Service Set...24 Exhibit Percent of Clients Receiving Services by Channel, Maintaining Differentiation...25 Chapter 2: A Sticky Issue Curbing IBD Migration to RIA and Dually Registered...27 Which Advisors Leave and Why?...27 Exhibit Advisors' Preferred Channel by Practice AUM, Exhibit Assets Required to Consider Opening an RIA, Exhibit Appeal of Opening RIA Practice, Exhibit Advisor Attitude Toward B/D Affiliation, How Can B/Ds Recapture Assets?...30 Exhibit B/D Strategy to Retain Fee Assets, Competing on Advisor Economics...31 Exhibit Percentage of Revenue Received from 12b-1 Fees, Designing the IBD Offering...32 Exhibit IBD Advisor Rating of B/D Technology, Exhibit Advisor Compensation by Channel, Reworking Compliance as a Competitive Advantage...35 Nurturing Relationships...36 The Road Ahead...36 C A 6 The Cerulli Report RIA Marketplace 2013

3 Expanded Table of Contents Chapter 3: Market Sizing...37 Exhibit Retail-Focused RIA Market Segmentation by Practice Type, Exhibit Retail-Focused RIA Firm and Asset Marketshare Change by AUM Segment, Exhibit Retail-Focused RIA Firms, Assets, and Advisors by Affiliation Model, Exhibit Retail-Focused RIA Firms by Segment, Exhibit Projected RIA and Dually Registered Combined Marketshare, E...43 Exhibit 3.06-Part 1. Top-50 Retail-Focused RIA Firms by AUM, Exhibit 3.06-Part 2. Top-50 Retail-Focused RIA Firms by AUM, Exhibit Top-20 Retail Independent Firms, Exhibit Top-20 Retail Dually Registered Firms, Exhibit Top-20 Mixed Independent Firms, Exhibit Top-20 Mixed Dually Registered Firms, Exhibit Top-25 RIAs by Asset Growth, Chapter 4: Drivers of Growth...51 Exhibit Net Flows into the RIA Channel, Exhibit Net Flows into the Dually Registered Channel, Exhibit Reasons for Client Acquisitions by Channel, Exhibit Reasons for Client Withdrawals by Channel, Exhibit Source of New Client Flows by Channel, Exhibit RIA Mergers and Acquisitions: AUM and Number of Transactions, Q Exhibit RIA Succession Planning, Exhibit Anticipated Multiple of Revenue on Sale of Practice, Exhibit Potential Buyers, Chapter 5: Custodians...62 Exhibit Custodian Share of RIA Firms by Firm AUM, Exhibit Service Agent Comparison: Average RIA Client Assets by Service Agent, 2Q Exhibit RIA Assets by Service Agent, Q Exhibit Total Number of RIA Clients, Q Exhibit Service Agent Comparison: Mutual Fund Assets from RIAs, 2Q Exhibit Distribution of RIA Assets by Investment Products, 2Q Exhibit Service Agent Services Offered, 2Q Exhibit Number of Service Agents Used by Firm AUM, Exhibit Factors That Could Cause an Advisor to Switch Service Providers, Chapter 6: Profile and Practice...73 Exhibit Retail-Focused RIA Practice Type Definitions, Exhibit Client Investable Assets by Firm AUM, Exhibit Advisor Age by Firm AUM, The Cerulli Report RIA Marketplace C A

4 Table of Contents Expanded Exhibit Advisor Experience by Firm AUM, Exhibit RIA Time Allocation by Firm AUM, Exhibit RIA-Reported Portfolio Discretion Breakdown, 2013 vs. 2016E...80 Exhibit RIA Business Model by Firm AUM, Exhibit RIA Team Staffing by Firm AUM, Exhibit Advisors Maintaining a B/D Affiliation, Exhibit Dually Registered Asset Custody Location, Exhibit Net Change in Opinion of Dually Registered Advisors on Retaining B/D License, Chapter 7: Services...87 Exhibit Percent of RIA Clients Receiving Services by Firm AUM, Exhibit Percent of RIA Clients Receiving Services by Client Investable Assets, Exhibit Advisory Fee by Client Account Size, Exhibit Percentage of RIA Clients Receiving Modular or Comprehensive Planning Advice, 2013 vs. 2016E...91 Exhibit Potential Benefits of Extending Financial Planning Services to Clients by Channel, Exhibit Major Challenges to Increasing Financial Planning Engagements by Channel, Exhibit Average Financial Planning Fees by Plan Type, Chapter 8: Clients...95 Exhibit Households' Trust of Financial Firms Databank, Exhibit RIA High-Net-Worth Clientele by Firm AUM, Exhibit Frequency of RIA Touchpoints by Contact Type, Exhibit Frequency of RIA Touchpoints by Contact Type and Firm AUM, Exhibit Unsolicited Client Product Requests by Channel, Exhibit Client Concerns by Investment Product, Exhibit Percentage of Advisors' Clients by Relationship Type, Chapter 9: Portfolio Construction Exhibit RIA Portfolio Construction Strategy by Firm AUM, Exhibit Portfolio Construction Process by Channel, Exhibit Preferred Source of Portfolio Construction Support, Exhibit Average RIA Moderate Portfolio Allocation, Exhibit RIA Beliefs on Active and Passive Management, Exhibit Average Annual Mutual Fund Turnover by Firm AUM, Exhibit RIA Investor Risk Tolerance, C A 8 The Cerulli Report RIA Marketplace 2013

5 Expanded Table of Contents Chapter 10: Product Use Exhibit RIA Assets by Product, Exhibit Dually Registered Assets by Product, Exhibit RIA-Reported Allocation to Investment Products, Exhibit RIA-Reported Allocation to Investment Products by Firm AUM, Exhibit RIA-Reported Expected Changes in Product Use, Exhibit Percent of Advisors Using Investment Products by Channel, Exhibit Means Used by RIA Teams to Make Product Decisions, Exhibit Most Important Factors in Choosing to Invest with an Asset Manager, Exhibit Source of Funds for Allocation to Alternatives, Exhibit Most Helpful Support for Increased Adoption of Alternatives, Exhibit Asset Classes for Which ETFs Are Used, Exhibit Advisor Use of ETFs in Portfolio Construction, Exhibit RIA Retirement Income Methods Utilized, The Cerulli Report RIA Marketplace C A

6 Sample Section From: The Cerulli Report RIA Marketplace 2013: The Changing Landscape of a Maturing Industry

7 Profile and Practice Chapter 6 EXHIBIT 6.03 Advisor Age by Firm AUM, 2013 Sources: Cerulli Associates, in partnership with the Investment Management Consultants Association, WealthManagement.com, Morningstar, FSI, and On Wall Street Firm AUM Age Bracket <$25m $25m-$49m $50m-$99m $100m-$249m $250m-$499m $500m-$999m $1b All RIAs <35 4% 5% 7% 7% 6% 8% 20% 7% % 9% 13% 22% 28% 22% 18% 19% % 24% 27% 28% 27% 37% 36% 27% % 39% 44% 32% 27% 28% 18% 33% 65 25% 22% 9% 11% 13% 6% 7% 14% Average RIA age The average age of advisors in a RIA firm is 52 years, and nearly half are age 55 and older. Key Implication: The average age of advisors in large practices is lower because they have made the investment to recruit and groom junior advisors. Many advisors hit an inflection point between $80 million and $100 million in client AUM when the size of their client base becomes untenable to manage as these advisors are pulled in many directions. As such, their service delivery becomes reactive, and they have limited time for business development activities, which in turn puts a ceiling on growth. Advisors at this juncture should evaluate whether a junior advisor could add additional advisory capacity and thus allow further growth. This role is generally responsible for fully managing small to medium-sized client relationships and helping senior advisors service their largest clients. This allows senior advisors to focus more time on top clients and revenue-generating activities. Service advisors are not expected to build their own client base and, accordingly, they are primarily compensated with a base salary. In some instances, this individual could become a future successor, but it generally takes five to 10 years before that individual has adequate experience to be a viable candidate. It also depends on factors such as the development of rainmaking skills and the ability to finance the acquisition. The Cerulli Report RIA Marketplace C A

8 Services Chapter 7 EXHIBIT 7.04 Percentage of RIA Clients Receiving Modular or Comprehensive Planning Advice, 2013 vs. 2016E Sources: Cerulli Associates, in partnership with the Investment Management Consultants Association, WealthManagement.com, Morningstar, FSI, and On Wall Street 50% 40% 37% 42% 30% 28% 26% 20% 10% 21% 22% 14% 10% 0% Comprehensive financial planning Modular (issue-focused) planning Modular planning with no documentation No financial planning services Currently Planned for 2016 RIAs expect to provide comprehensive financial planning for approximately 42% of clients by RIAs estimate a 4% decrease in the amount of clients who receive modular planning without documentation. Key Implication: As seen in Exhibit 6.01, RIA financial planners average $122 million per firm; $32 million less than investment planners ($154 million). Though financial planners may offer a wider breadth of planning services, investment planners tend to run more scalable businesses. There is a substantial amount of time required to collect and report the information needed to deliver a financial plan. While many sophisticated clients may possess the asset levels and needs that require comprehensive services, RIAs should understand that this time spent may be a significant opportunity cost that prevents business development. Financial planners could consider modular planning as it allows them to provide a higher level of service than investment planners while still allotting time for business development. The Cerulli Report RIA Marketplace C A

9 Company Index Company Index Arnerich Massena...48 AYCO Beacon Financial Advisors...50 Betterment...50 Capital Advisors...83 Charles Schwab...32, 62, 64, 66, 68 Commonwealth Financial Network Edelman Financial Services...45 Fidelity...32, 62, 63, 64, 66, 67, 68, 70 First Principles Capital Management...49 Fisher Investments...44, 45, 47 Frost Investment Advisors GenSpring...46 Hall Capital Partners...44, 48 Highmark Capital Management...48 Hirtle, Callaghan & Co Iconiq Capital...50 ICMA Retirement Corporation...44, 47 Jefferson National KB Financial Partners MIO Partners...48 LPL...62, 65, 66, 72 Pershing...32, 69 Personal Capital...12, 38, 45 Raymond James...31, 72 RBC...66 Rockefeller & Co...46 SageView Advisory Group...49 SunTrust TD Ameritrade...32, 65, 68 Trust Company of America...66, 70 United Capital U.S. Capital Advisors...83 Wealthfront...12, 38, 45 Wealth Plus st Global...35 C A 128 The Cerulli Report RIA Marketplace 2013