Custom Investment Outsourcing Fay DeBellis, CFP, SIMC Senior Vice President Bryant Waller, CFP Financial Advisor For One-on-One Use Only With Clients and Prospects 2013-PS-327 11/13
The Importance of Managing Risk Fulfilling fiduciary responsibility has become more difficult given the growth in complexity of the financial markets coupled with increased regulatory, compliance and due diligence requirements. These risks can be addressed through a range of methods. Policy Risk Fiduciary Risk Monitoring risk-return profile Evaluating capital market assumptions Reviewing investment policy Conducting volatility and attribution analyses Creating and adhering to an effective investment policy statement Ensuring consultants are aligned with the organization s interests Setting and monitoring various benchmarks Participating in ongoing education Portfolio Risk Provider Selection Risk Performing risk budgeting Evaluating and selecting top-tier advisors Extensive investment manager due diligence Conducting multi-factor risk analysis Compiling and evaluating portfolio analytics: Volatility, market risk (beta), foreign currency, leverage (if appropriate), liquidity and tracking error Ensuring rigorous, comprehensive compliance capabilities and internal audit controls are in place Monitoring compliance with internal policies and local, state and federal governing legislation 2
A Spectrum of Services Consulting Group Services Go it Alone Traditional Consulting Partial Discretion Full Discretion Standalone Committee Key Features Committee solely responsible for all aspects of investment process: Investment policy statement development and monitoring Asset allocation Manager search and selection Portfolio construction and implementation Performance monitoring and oversight????? Project-Oriented Approach Driven by Committee Needs Key Features Consultant provides information on specific subjects to help committee make informed decisions: Manager search Special studies Committee responsible for portfolio construction and implementation Consultant provides portfolio monitoring and performance reporting How is your investment committee spending its time? Collaborative Approach Between Committee and Consultant Key Features Consultant assists with investment objectives and guidelines Tailored portfolio construction advice Collaborative portfolio management Some investment advisory services may be discretionary Committee approval required for some or all investment decisions Consultant provides portfolio monitoring and performance reporting Consultant or committee responsible for portfolio construction and implementation Committee Oversees Outsourced CIO Relationship Key Features Consultant assists with investment objectives and guidelines Tailored portfolio construction advice Full discretionary portfolio management Consultant fully responsible for: Asset allocation Manager due diligence, selection, replacement Rebalancing; Portfolio construction and implementation Risk management Portfolio monitoring and performance reporting Committee time directed to big picture monitoring rather than day-to-day decisions 3
Consulting Group Founded in 1973, Consulting Group has evolved into one of the industry s premier investment consulting businesses, providing discretionary outsourced CIO and nondiscretionary advisory services to a range of institutional clients. As the industry leader in managed money services,* Consulting Group combines the resources, scale and oversight of a truly global financial services business with independence, objectivity and a commitment to excellence in client service. History of innovation in investment platforms and services Access to Morgan Stanley s intellectual capital and operational infrastructure to support asset allocation advice; economic, capital markets and investment manager research; and risk management Accolades** #1 Managed accounts platform by assets* #1 Number of nonprofit clients #1 Number of public/government clients #2 Number of defined benefit (DB) plan clients #2 Number of foundation and endowment clients #3 Number of Taft-Hartley clients #1 Separately managed account (SMA) manager due diligence*** Total Institutional Client Composition by Assets (Consulting Group as of December 31, 2012) Hospital or Healthcare Public Funds 401(k) and Defined Contribution Taft-Hartley Funds * Cerulli Associates, 3Q 2013 Managed Accounts Summary. See the disclosures at the end of this presentation for additional information. ** Unless otherwise noted, the source for these statistics is Plan Sponsor Magazine, 2011 Consultants Survey. *** FundFire Survey, February 11, 2011. 13% 10% Other 5% 4% 22% 14% 16% 17% Foundations, Endowments & Other Nonprofits Corporations Private Clients 4
Differentiating Characteristics Industry Leadership We are one of the industry s most established investment consultants and a pioneer in investment manager due diligence. Consulting Group has focused on institutional investment consulting since the 1970s, offering a range of customized investment services backed by the resources of a global financial services institution. $650.6 billion in assets under management* 265+ Consulting Group professional staff** Manager Due Diligence 140+ Manager research professionals*** 1,200+ Investment products Traditional and alternative strategies Separately managed accounts (SMAs), mutual funds, ETFs MLPs, hedge funds, private equity, HFOF, real estate, commodities, etc. Independence & Objectivity Cost-Efficient, Integrated Solution Global Reach Local Experience And Stability Open architecture platform Independent, non-proprietary investment managers and products Unbundled pricing structure Negotiated investment manager fees As part of Morgan Stanley, we can provide access to a full range of global financial services designed to meet your evolving needs. Morgan Stanley Financial Advisors are based locally to provide ongoing support and client service, and supported nationally by a team of dedicated portfolio managers and other investment professionals. * Cerulli Associates, 3Q 2013 Managed Accounts Summary. See the disclosures at the end of this presentation for additional information. ** As of February 27, 2013. *** As of February 27, 2013. Includes professional staff across traditional and alternative investment manager research teams at Morgan Stanley. 5
Custom Investment Outsourcing Services Founded in 1992, our Custom Investment Outsourcing (CIO) platform provides sophisticated investment services tailored to meet your organization s needs. Investment Policy Investment Strategy Spending policy analysis Strategic asset allocation Liability analysis Tactical asset allocation Capital markets assumptions Custom portfolio construction Assistance with policy benchmark development Assistance with investment policy statement development Daily policy guideline review Investment manager due diligence Manager hiring, replacement process Strategy and portfolio rebalancing Risk management Implementation Ongoing Support Management of policy restrictions Performance reporting and attribution Manager billing As-needed review of strategy changes Negotiated manager fees Documentation Contracts with managers Fiduciary education Trade execution Morgan Stanley custody of assets 6
CIO Discretionary Relationship Model Client Investment Officer Risk Management Philanthropic Services Impact Investing Investment Strategy Portfolio Construction Banking and Lending Custody and Reporting Manager Intelligence Portfolio Oversight OCIO Investment Team Complementary Resources 7
Investment Philosophy Action should be taken through discipline, not emotion. Managing total portfolio risk is essential to achieving long-term objectives Actively managing asset allocation, portfolio composition and manager selection can potentially enhance returns Active risk budgeting can enhance the potential value derived from hiring investment managers Blending active and passive investments can potentially help improve investment results, manage costs and refine the management of active risk 8
Investment Process The Custom Investment Outsourcing investment process is applied across all discretionary portfolios constructed and managed through the CIO program. Systematically test actual weights vs. policy Understand current state vs. objectives Establish strategic framework Opportunistically over/underweight asset classes Examine variations in: Portfolio level risk Strategy Managers Realize where active risks are taken Spend active risk efficiently Express views by allocating to high conviction strategies 9
Administration Investment Management Policy Roles and Responsibilities The [Financial Advisor Team] manages the relationship between [client name] and Morgan Stanley while the Investment Officer has discretion over the investment management services that support you in meeting your long-term objectives. Responsibilities [Client Name] Morgan Stanley Define Objectives and Risk Tolerances Support Role Establish Investment Policy Support Role Approve Investment Policy Asset Allocation Strategy Risk Management Conduct Manager Searches Hire Managers Replace Managers (when needed) Performance Reviews and Attribution Sign Manager Contracts Sign Subscription Agreements Authorize Custodial Transfers Instruct Managers to Raise Cash Pay Asset Manager Fees 10
Summary Investment Policy Statement Spending policy and liability analysis Capital market assumptions Risk profile and policy benchmark development Discretionary investment management by Consulting Group: Custom strategic and tactical asset allocation Portfolio construction Manager due diligence and investment product selection Strategy and portfolio rebalancing Ongoing risk management and monitoring Implementation and trading (no commissions charged if traded through Morgan Stanley Smith Barney LLC) Implementation using unaffiliated, third-party investment managers and products Policy restriction management Trade execution Manager contracts and billing Full transparency, quarterly attribution and performance reporting Dedicated oversight by a Morgan Stanley CIO Investment Officer Full transparency of fees 11
Your Team: The Northern Lights Group Fay DeBellis, CFP, SIMC Senior Vice President Wealth Advisor Phone: 612-340-6746 Email: fay.debellis@ms.com Bryant Waller, CFP Financial Planning Specialist Financial Advisor Phone: 612-340-6706 Email: bryant.waller@ms.com Standing L-R: Stacy Eng, Meagan McCoy Seated L-R: Fay DeBellis, Bryant Waller 225 South Sixth Street Suite 5100 Minneapolis, MN 55402 Stacy Eng Senior Registered Associate Phone: 612-349-4847 Email: stacy.a.eng@ms.com Meagan McCoy Marketing Associate Phone: 612-340-6770 Email: meagan.mccoyl@ms.com 12
Important Disclosures Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the Firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the Firm s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Cerulli Associates, 3Q 2013 Summary Report. Cerulli Associates data are based on data submitted by firms participating in Cerulli s survey. Morgan Stanley Wealth Management was ranked No. 1 in terms of assets under management out of the firms listed in the industry for the quarter with respect to Top Managed Account Program Sponsors Across All Industry Segments. This category includes separate account consultant programs, mutual fund advisory programs, ETF advisory programs, rep as portfolio manager programs, rep as advisor programs and unified managed account programs. Separate account consultant programs are programs in which asset managers manage investors assets in discretionary separate accounts. Mutual fund advisory programs and ETF advisory programs are discretionary and nondiscretionary programs designed to systematically allocate investors assets across a wide range of mutual funds or ETFs. Rep as portfolio manager programs are discretionary programs in which advice is an essential element; planning is undertaken or advice is treated as a separate service from brokerage. Rep as advisor programs are nondiscretionary programs where the advisor has not been given discretion by the client and must obtain approval each time a change is made to the account or its investments. Unified managed accounts are vehicle-neutral platforms that simplify the delivery of multiple investment vehicles, such as separate accounts, mutual funds, exchange-traded funds and individual securities through their integration within a single environment. Rankings are subject to change. Some historical figures may be revised due to newly identified programs, firm restatements, etc. Plan Sponsor, September 2011. Plan Sponsor magazine submitted questionnaires to 150 retirement plan consulting firms in July 2011. A total of 60 retirement plan consulting firms completed the questionnaire. The top ten consultants are listed by various criteria as reported in the survey. For more information, go to www.plansponsor.com. For the purposes of this survey, institutional is defined as any type of retirement plan, including foundations and endowments and other nonprofits. The ranking is not indicative of a firm s future performance. Neither Morgan Stanley nor its affiliated financial advisors pay a fee to Plan Sponsor in exchange for this report. FundFire Survey, February 2011. This survey by FundFire included responses from more than 40 managed account managers who work with various separately managed account (SMA) program sponsors. Managers were asked to rate a number of SMA sponsors on the thoroughness of their manager review process on a scale of one (weakest) to five (toughest). Alternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures funds, funds of hedge funds, private equity, and managed futures funds, are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor. Alternative investments are not suitable for all investors. 13
Important Disclosures Depending on the size of the client account, liquidity mandates or other concerns, alternative investments for the account may be limited to separately managed accounts, US-registered mutual funds and exchange-traded funds (ETFs) that seek to pursue alternative investment strategies or returns. Such investment products may employ various investment strategies and techniques, for both hedging and more speculative purposes, such as short selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. Risk Budgeting. Risk budgeting allows investors to understand the relative active risks they may be taking, and where those risks reside in the portfolio. It is a method based on historical data that helps to identify and spend active risk efficiently with the goal of enhancing risk adjusted returns. Investing in the markets entails the risk of market volatility. The value of all types of investments may increase or decrease over varying time periods. Asset allocation does not assure a profit or protect against loss. There may be potential tax implications with a rebalancing strategy. Please consult your tax advisor before implementing such a strategy. Morgan Stanley, its affiliates and employees are not in the business of providing tax or legal advice. Investors should consult their own tax and legal advisors, at both the outset of any transaction and on an ongoing basis, to determine such suitability. Morgan Stanley Smith Barney LLC ( Morgan Stanley ) is a registered Broker/Dealer, not a bank. Investments and services offered through Morgan Stanley, are not insured by the FDIC, are not deposits or obligations of, or guaranteed by, a bank and involve investment risks, including possible loss of principal amount invested. Where appropriate, Morgan Stanley has entered into arrangements with banks and other third parties to assist in offering certain banking related products and services. Banking and credit products and services are provided by Morgan Stanley Private Bank, National Association, Morgan Stanley Bank, N.A. or other affiliates. To learn more about the investment capabilities and custom portfolios delivered through the Custom Investment Outsourcing program, please contact your Morgan Stanley Financial Advisor. The Custom Investment Outsourcing program is described in the applicable Morgan Stanley Smith Barney ADV Part 2, available at www.smithbarney.com/adv or from your Morgan Stanley Financial Advisor. 2013 Morgan Stanley Smith Barney LLC, member SIPC. Consulting Group is a business of Morgan Stanley Smith Barney LLC. 2013-PS-327 11/13 14