Opening Keynote Presentation: Chip Roame (Managing Principal, Tiburon Strategic Advisors)

	Tiburon Managing Principal Chip Roame kicks off the Eleventh Semi-Annual Tiburon CEO Summit with the firm's signature Future of Advice presentation

Tiburon CEO Summit XI kicked off with a keynote presentation by Chip Roame (Managing Principal, Tiburon Strategic Advisors). Chip welcomed the attendees, gave an overview of Tiburon, and addressed the state of the financial services industry, challenging the group with a long list of current industry issues to consider and discuss.

Tiburon Strategic Advisors

In updating the group of clients on Tiburon's activities, Mr. Roame noted that, "Tiburon has positioned itself uniquely as a market research & strategy consulting firm; the firm's services include a series of research reports, conference speeches, market seminars, and market research & strategy consulting services, with the later two accounting for more than two-thirds of Tiburon's revenues." The firm has served almost 300 corporate clients (75 of which were represented at the CEO Summit), and completed almost 900 projects since its founding in 1998, and today, the firm's knowledge base includes mutual funds distribution, separately managed account programs, alternative investments, wealth management services, insurance products, banking services, the fee-only financial advisor market, the CPA firm market, the family office market, and various international markets.

State of the Financial Services Industry

After sharing the short update on Tiburon, Mr. Roame discussed the state of the financial services industry broadly, leveraging and introducing the CEO Summit agenda. He focused on the key issues that would likely be addressed by the general session guest speakers, the topics that he hoped would be addressed by the general session panel discussions, and the questions that he suggested be debated in the break-out sessions. Specifically, Mr. Roame started by suggesting that five recent news stories and five recent Tiburon research findings be discussed:

Five Recent News Stories

• Two full-service brokerage firms (Merrill Lynch & Smith Barney) recently exited the investment management business, signaling a perceived conflict of interest, while other firms, including that led by guest presenter David Carroll (President, Capital Management Group, Wachovia Corporation), appear to building their investment management capabilities
• Two leading load mutual fund firms are for sale, initially suggesting challenges in the old investment management models, but possibly being more related to investment performance and talent retention issues
• Product proliferation continues in the mutual funds, exchange traded funds, & hedge fund industries, suggesting opportunities for consolidation (He noted that there are now more hedge funds than mutual funds!)
• Bank of America has almost caught Citigroup in terms of market capitalization, signaling the power of retail distribution and the stock market's reward for building steady fee-oriented retail businesses
  
• Venture capital & technology has entered round two (however Mr. Roame noted that little ever changes in technology vendor market shares in financial services, with long-dominant competitors like Thomson's Beta, CheckFree's APL, and Advent's Axys continuing to dominate their respective sub-markets)

Five Recent Tiburon Research Findings

• Fidelity Investments passed Merrill Lynch as the largest financial services firm based on client assets (over $1.5 trillion!), signaling the growth in fast growing business models such as no-load funds, discount brokerage, independent broker/dealers (clearing), RIAs (custody), and 401k plans
• Data for separately managed accounts & other fee-account programs continues to be miscalculated, leaving out the fee-only financial advisor (RIA), bank trust, and true separate account businesses, leading to inaccurate conclusions on the growth of various products and the perceived dominance of separately managed accounts (by calculating correctly, Mr. Roame argued that the mutual fund wrap account and broker wrap account markets may actually be larger than the separately managed accounts market)
• The number of independent reps passed that of wirehouse reps (80,000 versus 70,000), suggesting the power of independence (although he also drew attendees attention to the lower average assets under administration for independent reps $12 million versus $70 million for the average wirehouse broker)
• Online brokerage firms are continuing to gain share in consumer investable assets, suggesting continued success in client acquisition and even client retention
• International markets continue to be sexy but small; while not being anti-international, Mr. Roame cautioned the group simply to keep perspective, offering examples such as the United Kingdom having similar investable assets to those in California and Canada having similar investable assets to those in Pennsylvania

Subsequently, Mr. Roame offered up challenging questions to be raised in each of the nine break-out sessions:

• Products Break-Out Session: Mutual Funds & Exchange Traded Funds
  • Are mutual funds dead (or are they America’s core financial product)?
    
  • Do the pending sales of MFS & Putnam represent the death of the traditional model (or do they represent attention to poor investment performance or the inability to retain investment talent)?
    
  • Does the concentration of mutual fund flows in four-to-six mutual fund companies threaten small mutual fund companies?
    
  • Is the centralization of investment selection (e.g., wrap programs) changing the mutual funds game?
    
  • Are target date mutual funds (especially in 401K plans) changing the mutual funds game?
    
  • Will performance fees become the new pricing mechanism?
    
  • Is indexing slowly taking over the industry?
    
  • Will the fast growing segments of independent reps and fee-only financial advisors shift their product use away from mutual funds?
    
  • Will exchange traded funds threaten mutual funds?
    
  • Will actively managed exchange traded funds be approved anytime soon (and will they make the market explode in size)?
    
  • Will Barclays be able to maintain its dominant market share in the growing ETFs market?
    
    
• Products Break-Out Session: Separately Managed Accounts & Other Fee-Account Programs
  • Have fee-accounts become the dominant model at the wirehouses?
    
  • Are fee-accounts concentrated in the wirehouses or are the wirehouses actually pretty small players relative to fee-only financial advisors, bank trust departments, and money managers?
    
  • Will separately managed accounts as a product continue to dominate the press (and maybe the assets)?
    
  • Will fee-only financial advisors shift their product use from mutual funds to separately managed accounts (or will they go in mass to exchange traded funds instead)?
    
  • Will the fast growing independent rep market increase its use of fee-accounts (or is its average client at $142,000 simply too small)?
    
  • Will multiple style portfolios open up the use of separate accounts to part-time investments channels like banks, CPAs, and insurance agents?
    
  • Aren’t unified managed accounts the obvious conclusion (or even better yet, unified managed households)?
    
  • Will turnkey asset management programs gain great share of assets as more firms look to outsource administrative aspects?
    
  • Will money managers see their margins squeezed, leading to exits from some top performing managers?
    
    
• Products Break-Out Session: Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investments
  • Will hedge fund products be utilized by increasing numbers of high net worth and moderate net worth households?
    
  • Will the real growth in hedge funds come from non-taxable institutional investors with unlimited time horizons?
    
  • Will the aggressive investment strategies of some hedge funds and the product proliferation lead to continual blow ups?
    
  • Will the blow ups (and other scandals) hinder industry growth?
    
  • Which investment strategies (equity, arbitrage) will gather substantial consumer assets in the next decade?
    
  • Will hedge fund strategies packaged as mutual fund products ultimately win?
    
  • Do multi-strategy multi-manager hedge funds-of-funds provide diversification (or after taxes & fees, are their average returns poor)?
    
  • What firm will clean up hedge funds data (and how misleading is it today)?
    
  • Are venture capital & private equity potentially the most useful alternative asset classes & will they grow rapidly?
    
  • Will high net worth households gain access to top tier venture capital & private equity funds?
    
  • Does real estate need to be better packaged (or are Americans already overexposed to real estate)?
    

• Markets Break-Out Session: Captive Advisors (Brokers, Bankers, & Insurance Agents)
  • The sales forces of the wirehouses (Merrill Lynch), captive financial planning firms (Ameriprise Financial), and insurance companies (Northwestern Mutual) have generally not grown over the past five or seven years; is this an intentional focus on quality over quantity?
    
  • Morgan Stanley executive James Gorman boldly commented at a recent SIA meeting regarding no longer tolerating low-end producers; does this represent the industry’s overarching view?
    
  • Instead of quantity, is the industry’s focus one of shifting to high net worth consumers, fee-accounts, & wealth management services?
    
  • Is Morgan Stanley retail on the block (will the firm just maintain the old Morgan Stanley high net worth business)?
    
  • As the independent advisor channels have been outgrowing the captive advisor channels, is the right response the multi-model offerings of Wachovia Corporation, Raymond James, and Ameriprise Financial?
    
  • Are the banks (and even H&R Block) attracting more successful advisors?
    
  • Can Wachovia’s localized wealth management model revolutionize the world?
    
  • Are the insurance companies the likely winners in the market for retirement income products and broader wealth management services?
    
    
• Markets Break-Out Session: Independent Advisors (Independent Reps & Fee-Only Financial Advisors)
  • The number of independent advisors (80,000 independent reps & 20,000 fee-only financial advisors) has now far outdistanced the number of wirehouse brokers (70,000); is independent the future?
    
  • Because of low production, independent advisors account for just 1/3 of the assets of the wirehouses; will this change?
    
  • Independent reps are growing in numbers but fee-only financial advisors are growing much faster in assets under management; what gives?
    
  • Is the slowed flow in numbers into the fee-only financial advisor market indicative of the future?
    
  • With its 98% payouts and high service levels, is LPL going to run away with the independent rep market (and have a hugely successful IPO)?
    
  • Although numerous new competitors have entered the custody business, Charles Schwab & Company still retains asset dominance ($468 billion); will any firm be a real challenger?
    
  • Will future flows into the independent advisor markets be hindered because of the current slow growth of the captive advisor channels (e.g., wirehouses, captive financial planning firms, insurance agents)?
    

The CEO-level attendees really enjoyed Mr. Roame's opening remarks and agenda setting; Dave Petersen (President, Financial Services Advisory) said that, "Chip's take was excellent. It set the stage for our industry by asking insightful questions." Dennis Clark (CEO, Advisor Partners) added that, "Chip is the master of getting everyone focused on the right questions."

Guest Presentations

Aside from Mr. Roame's opening keynote presentation, five guest presentations anchored the CEO Summit agenda:

David Carroll (President, Capital Management Group, Wachovia Corporation) Guest Speaker David Carroll from Wachovia Corporation addressed the multi-line businesses of Wachovia Securities and Evergreen Investments that he leads David Carroll is President of Wachovia's Capital Management Group, which includes three core businesses: Retail Brokerage (Wachovia Securities), Asset Management (Evergreen Investments), and Retirement & Investment Products. Mr. Carroll joined Wachovia in 1981 and has subsequently served in many capacities, including serving as the head of Corporate Support Services, Wachovia Mortgage, & Corporate Marketing, as well as Chief eCommerce & Technology Officer, and President of First Union Florida. Mr. Carroll was also in charge of merger integration during the historic Wachovia and First Union merger. Mr. Carroll's perspective is unique in that he manages both a manufacturing operation (Evergreen Investments) and a distribution operation (Wachovia Securities), the later of which has four distinct business models. Collectively these businesses represent 10,514 financial advisors, $704 billion assets under administration, $256 billion of assets under management, over $2.0 billion in revenues, and $673 million of earnings. In his comments, Mr. Carroll outlined Wachovia's strategies in both brokerage and investment management, addressing the key timely industry topics laid out by Mr. Roame and saying that, “a separately branded Evergreen will do fine.” He further said that, “Putnum and MFS may have been on the block because firms have to perform when they are parts of public companies.” And finally Mr. Carroll observed that, “Merrill Lynch may have had to do something because it could not get its funds sold at Smith Barney and other broker/dealers.” However he said, “Merrill Lynch hardly distanced itself from its investment management firm with the BlackRock transaction, as it still owns a huge share.” Going beyond Mr. Roame's top news stories, Mr. Carroll also said that his business units were put together because Wachovia Corporation believes that product packaging is at least as important as product manufacturing. Mr. Carroll also shared dozens of other useful facts and opinions about all three of his businesses; he started with the brokerage business, including his firm's business unit Wachovia Securities: Wachovia Securities is made up of 70-80 brokerage firms that have been acquired Since its Prudential Securities acquisition, Wachovia Securities is the third largest retail brokerage firm with 10,514 financial advisors in 49 states, $704 billion of assets under administration, and $1.2 billion of net revenues The firm hopes to combine the regional firm culture with wirehouse capabilities The firm has a strong focus on the financial advisor-client relationship Wachovia Securities is focused on increasing financial advisor productivity, amongst other issues The firm is focused on helping its brokers capture managed assets, with $122 billion today Wachovia Securities is hoping to widely deploy its Envision financial planning program, Which it believes equips financial advisors to understand and address clients' life aspirations Access to Wachovia Bank’s core banking products allows Wachovia Securities financial advisors to meet a larger set of their clients’ needs Wachovia offers three financial advisor platforms, including its traditional private client group (5,966 financial advisors, $415 billion assets under administration), its investment services group (bank brokers)(3,785 financial advisors, $125 billion assets under administration), and its independent brokerage group (763 financial advisors & 123 correspondent firms, $141 billion assets under administration) The bank broker model still has lots of potential, as it can extend brokerage capabilities to bank customers Wachovia Securities' multi-platform model recently allowed captive employee advisors to move to its independent platform There is room at Wachovia Corporation for both private banking and brokerage offerings (Wachovia's private bank is the fourth largest wealth manager in the US) with 39,000 clients and $68 billion of assets under management Mr. Carroll also addressed the money management business, including his firm's business Evergreen Investments: Evergreen Investments is the 21st largest investment management firm and it seeks to offer diversified products across the equity, fixed income, and short-term asset classes Evergreen’s $256 billion of assets under management include $103 billion of institutional assets, $100 billion of mutual fund & variable annuity assets, and $53 billion of high net worth assets from its wealth management business Evergreen Investments' successes have varied by market; in the institutional market, 70% of its assets under management are in its fixed income strategies, while only 23% of its mutual fund & variable annuity assets and 26% of its high net worth client assets are the same (the later having larger equity and/or money market components) The broader Wachovia Corporation is focused on growing its investment management business (again, unlike Merrill Lynch and Smith Barney that exited) Along with the Tattersall Group, JL Kaplan Associates, and Golden Capital Management, Evergreen Investments acquired Met West Capital Management in 2004; this is one of the largest third-party lending firms with $60 billion of securities on loan Lots of alternative investment firms are being shopped; Mr. Carroll noted that his firm has looked at "hundreds" Acquisitions of money management firms are difficult due to high multiples, and ultimately social issues, such as the ultimate CEO and headquarters location, drive most merger & acquisitions transactions And finally Mr. Carroll noted that Wachovia had sought an increased emphasis on the retirement business by recently bundling various business under his leadership through its retirement & investment products division. The firm sees retirement as the single largest retail growth opportunity in personal financial services: Wachovia Corporation's retirement & investment products division is a manufacturer and distributor of key retirement products, including IRAs, 401k plans, and annuities The firm acquired Ameriprise’s defined contribution record keeping business earlier this year, giving it $98 billion in retirement plan assets under administration and 2.1 million plan participants, and this made the firm the ninth largest manager of institutional retirement plans in this consolidating industry Wachovia corporation has $145 billion in IRA assets, making it #6 in the US Wachovia is the #1 seller of annuities in the US, with $5.9 billion in annual annuity premium sales Mr. Carroll's comments were well received; Dave Petersen (President, Financial Services Advisory) said that, "David Carroll is an innovative mover & shaker in our industry; his basic message was lead, follow, or get out of the way." Kirk Michie (Managing Director, Lenox Advisors) said that, "the magnitude of Wachovia Corporation's assets is stunning." After listening to his comments, Tiburon's Managing Principal Chip Roame stated that, "Wachovia really seems to grasp the market opportunity." Tiburon has recently completed several projects for Wachovia Corporation and Mr. Carroll was introduced by Chip Roame (Managing Principal, Tiburon Strategic Advisors). Ken Fisher (CEO, Fisher Investments) Ken Fisher is CEO of Fisher Investments, a firm he founded thirty years ago. He is best known for his use of both direct mail and advertising, as well as his portfolio strategy investment column in Forbes magazine. His twenty-two year tenure at Forbes makes him the fifth longest running columnist in the magazine's eighty year history. He was also recently named to the Forbes 400 list as the 320th wealthiest American. Mr. Fisher has been an innovator. His theoretical work in the early 1970s yielded a tool known as the price-to-sales ratio, now a core element of modern financial curriculum. In the 1980s, he helped create a school of equity style management called domestic small cap value equity, now a major category for institutional and retail investors. Mr. Fisher has also written three major finance books, including the 1984 best seller Super Stocks; his recent research focuses on the emerging field of behavioral finance. Guest Speaker Ken Fisher from Fisher Investments kept everyone on their toes with his unconventional and amazingly successful views regarding building investment firms Obvious to all of our mailboxes has been Mr. Fisher's unique direct mail strategy, and this has led to an 850 employee, 17,000 client, and $32 billion vertically-integrated operation, making it one of the largest founder run investment management firms. Mr. Fisher's presentation, "Challenging Conventional Wisdom", outlined some of Fisher Investments' unique strategies, including formal hiring discrimination against MBAs and using junk mail as a primary marketing strategy. Said simply, Mr. Fisher refuses conventional thoughts regarding best practices, personal service relationships, and the idea that firms must choose between being distributors and manufacturers. Mr. Fisher made dozens of interesting points, challenging conventional wisdom and keeping attendees captivated: Fisher Investments gathers $400 million of net new assets per month (yes, per month!); if it were a mutual fund company, this would make it the sixteenth largest gatherer of assets For more perspective, only 23 (out of 793) mutual fund companies recently showed positive net asset flows Fisher Investments is a direct seller; the firm does not participate in indirect sales (in other words, it participates in no separately managed account programs) The firm offers no wealth management services, uses no mutual funds, manages mostly individual equities, and typically charges 1.00% The firm's assets have come from a moderately affluent market as it manages $32 billion for 17,000 clients (about 2/3 high net worth), with an average of $1.4 million per client Ken Fisher believes that separating manufacturing from distribution leads to the loss of quality control Ken also believes Fisher Investments to be “the largest junk mailer & web advertiser” in investment management and calls himself a “proud junker” The firm has the most specialization of labor of any firm in asset management (Tiburon's Managing Principal Chip Roame, who has visited Fisher Investment's facilities, clearly agreed) Even with its telephone-based service operation, the firm has a client termination rate of just 5% (simply said, Fisher Investments rejects the notion that personal service relationships are mandatory for success) The firm provides ongoing client seminars within a two hour drive of 90% of all US households Fisher Investment's systemized approach is not done by ignoring investment performance: The firm has a fully global money management process, and utilizes both sector rotation and tactical asset allocation Fisher Investments has a ten-year Global Investment Management Performance Standards (GIPs) (the new AIMR) verified market-beating performance history Finally, Ken offered a useful piece of business advice: "Best practices create mediocrity; they make one refine existing models instead of innovating new models" Ken Fisher was a huge hit; attendees loved his challenging thoughts. Mitch Politzer (CEO, First Ameritas Life Insurance Company, Unifi Mutual Holding Company) said, “it is good to see someone who is a proud junker.” Tif Joyce (President, Joyce Financial Management) added, “everything he says flies in the face of conventional wisdom, so I keep reminding myself that he has gathered $32 billion.” Tiburon's Managing Principal, Chip Roame said, "you can't doubt Ken Fisher; his success speaks for itself." Mr. Fisher has attended Tiburon's last two CEO Summits and participated on the Investment Management Firm Founders panel at Tiburon CEO Summit X held this past April. Mr. Fisher was introduced by Chip Roame (Managing Principal, Tiburon Strategic Advisors), who himself spoke at Fisher Investments' sales conference this past year. Lee Kranefuss (CEO, Intermediary & Exchange Traded Funds Business, Barclays Global Investors, Barclays) Lee Kranefuss is the CEO of Barclays Global Investors' booming Intermediary & Exchange Traded Funds Business. Mr. Kranefuss joined Barclays in 1997 after spending six years with The Boston Consulting Group in San Francisco, CA, where he focused on consulting to retail and institutional financial services firms. Guest Speaker Lee Kranefuss from Barclays discussed Barclays' innovative strategy in the booming exchange traded funds marketplace through its dominant iShares offering After swapping a few fun jabs with Tiburon's Managing Principal Chip Roame about prior consulting careers (Mr. Roame was at McKinsey & Company when Mr. Kranefuss was at Boston Consulting Group), Mr. Kranefuss discussed both the tactics around Barclay's iShares offering and more philosophically, the culture at Barclays which enabled it to create such a dominate business in an emerging product area. Mr. Kranefuss first shared a few related facts: Barclays offers 116 exchange traded funds, more than any other firm. Lee explained that, “we looked at the few ETFs available in the 1990s and really liked them, but there just weren’t enough available, so we thought we’d create a modular building set thinking somebody should have done this before us” Barclays' iShares fund family is equity-biased with 107 of its 116 ETFs being equity funds (the firm does have plans to develop more fixed income funds) Barclays has no intention of shrinking its ETF family, with Lee saying that because of its indexing infrastructure, “Barclays can make money at pretty low asset levels” Barclays believes that about 50% of the assets in ETFs are from retail and institutional investors, with about 67% of flows coming from retail investors, a reversal of the earlier experience (he also estimated that about 80% of trades are institutional) Barclays is capturing 73% of net new assets in the exchange traded funds market More broadly, including mutual funds, Barclays is now #5 in fund assets and #3 in fund flows Lee feels that it will be a while before we see ETFs available as investment options within 401k plans, “it’s a plumbing and motivation issue,” he said, explaining the giant batch processes of the payroll vendors (he speculated though that the need for 12b1 fees could more easily be solved) Lee said there are, “lots of smart people working on active ETFs, but none are yet filed as it comes down to revealing the portfolios” More broadly, Mr. Kranefuss said that he sees big things for all exchange traded funds. He said that, “ETFs continue to provide a very attractive investment option and experience for institutions, advisors, and individual investors." He said that, "exchange traded funds provide a superior business model" and he predicted big success. Tiburon’s Managing Principal Chip Roame agreed, saying that, “exchange traded funds are the fundamental biggest investment innovation since mutual funds.” Mr. Kranefuss also addressed the Tiburon CEO Summit concept of innovation more broadly, saying, “you need to look at areas where you can get excited and commit fully as a firm. Barclays loved index funds, but more than just the Jack Bogle approach where one index fund would suffice. We thought if advisors had the lego kit, they could build much more dynamic portfolios.” Lee then explained that after detailed research, Barclays made a substantial commitment to the business. Tom Lydon (President, Global Trends Investments), who himself manages an ETF blog, noted that, “Barclays' success and innovativeness is incredible.” Tiburon’s Managing Principal Chip Roame added, “I would bet that Barclays will next invest in the 401k area; iShares will capture substantial share in that market within three-to-five years. And international markets will see rapid growth of ETF products as well. Lee and Barclays are innovators.” Barclays has recently benefited from the purchase of Tiburon's exchange traded funds research report and Mr. Kranefuss was introduced by Chip Roame (Managing Principal, Tiburon Strategic Advisors).

Andrew Rudd (CEO, Advisor Software; Chairman, Advisor Partners; and Founder & Former CEO, Barra) Andrew Rudd has been a founder of three successful investment firms - Barra (which he sold in a 1991 initial public offering, and then again in 2004 to Morgan Stanley for $900 million), Advisor Software Guest Speaker Andrew Rudd from Advisor Software discussed his firm's innovative technology solutions (in which he is still engaged today), and Advisor Partners (where he partners with Tiburon CEO Summit Planning Committee member Dennis Clark). Previously he was a professor of finance & operations at Cornell University. More broadly, Mr. Rudd is an expert in quantitative analysis, asset allocation, modern portfolio theory, risk management, and performance measurement (as well as, obviously, being an industry-leading entrepreneurial role model). He was the CEO of Barra from 1984 - 1999, and is the co-author of two books on institutional investing: Modern Portfolio Theory - The Principles of Investment Management and Option Pricing. At Advisor Software, Mr. Rudd is trying to deliver leading-edge analytics to retail investors. At the CEO Summit Mr. Rudd introduced the firm's third software solution which provides advisors with a more relevant approach to financial planning. The approach considers individuals’ entire balance sheets, including the element of human capital. Some of Andrew’s points included: Advisor Software was founded in 1995 to apply institutional-caliber analytics, perspectives, and rigor to the advisory marketplace to improve the quality of advice delivered Advisor Software now offers three technology solutions, one each for client acquisition, wealth management, and portfolio rebalancing Andrew noted that his research indicates that, "only about 25%-30% of people use financial advisors because of lack of control, arrogance, high fees, and poor support" He also used himself as an example, saying that in later years, life becomes complex and busy and he does not want to “spend the rest of his life watching a Bloomberg screen” He said that financial advisors all want to focus on the fun stuff (investments) where they can easily bill fees, while avoiding, often more important financial planning, insurance, and other issues Andrew believes that financial planning needs to start with the big picture of a family mission statement, which he thinks should identify goals. He sees one's balance sheet as a statement of resources and goals, with the surplus being the margin of safety Andrew believes that a comprehensive wealth strategy is a road map for success, requiring investment planning, tax planning, and risk management He believes that wealthy individuals have three choices – do it alone, hire a financial staff, or outsource their financial needs He also noted that, from personal experience, needs change over time, with simple issues like wills and life insurance giving way to more complex issues like concentrated stock positions, liquidity events, and even multiple generations and/or family units Mr. Rudd saw a gap in the market for the technology solutions to address these issues Advisor Software's new wealth management program has five key components, including a comprehensive balance sheet view, multiple-goal framework, asset allocation & investment selection, Monte Carlo simulation to model portfolio behavior versus goals, and dynamic recalibration over the investor's lifecycle Dennis Clark (CEO, Advisor Partners) said that, “Andrew is an inspiration.” Tim Armour (Managing Director, Morningstar) added that, “his holistic approach to financial planning should open some eyes.” Tiburon's Managing Principal Chip Roame stated that, "Andrew Rudd's entrepreneurial spirit exemplifies what is right in financial services." Advisor Software has recently benefited from the purchase of Tiburon's technology research report and Mr. Rudd was introduced by Tiburon CEO Summit Planning Committee member Dennis Clark (CEO, Advisor Partners). Myron Scholes (Professor, Stanford University; Author of the Black-Scholes Model; & Winner, 1997 Nobel Prize in Economics) Myron Scholes may be best known as one of the authors of the famous Black-Scholes model. In 1997 Guest Speaker Myron Scholes from Stanford University discussed the death of Modern Portfolio Theory he won the Nobel Prize in Economics for "a new method to determine the value of derivatives." The model provides the fundamental conceptual framework for valuing options, such as calls or puts, and is referred to as the Black-Scholes model, which has become the standard in financial markets globally. Trillions of dollars of options trades are executed each year using this model and derivations thereof. Today, Mr. Scholes is a professor at Stanford University and also leads a hedge fund firm called Platinum Grove Asset Management. Mr. Scholes organized his comments around Platinum Grove Asset Management's index plus contingent capital fund excess return strategy. Platinum Grove Asset Management was founded in 1999 and is based in Rye Brook, NY; it has $3.2 billion assets under management. Its core strategy combines investments in a benchmark index with investments in an actively-managed hedge fund that exhibits low correlation with the benchmark. Mr. Scholes most important points were the subtle lessons that were conveyed around the portable alpha concepts that are widely being discussed: Broadly, investors earn money in investing through systematic exposures, alpha or abnormal returns, liquidity provisions, and risk transfer Routes to produce the above types of returns vary in that active managers, hedge funds, banks, and broker/dealers compete to provide these return generating processes Excess returns and low correlation of returns for a hedge fund is the tool for active management in conjunction with benchmark investing Actively managed mutual funds compete with hedge funds as providers of excess returns Managers of every actively managed mutual fund use leverage – whether its obvious or not because it is simply not an index fund An actively managed mutual fund with net expenses of only 0.4% is in effect charging a management fee of 2.00% (0.40% x 5) on the actively managed component because investors can acquire the passive index component for free David Smith (Group Publisher, Financial Advisor Magazine, Charter Financial Publishing Network) said, "Myron Scholes is a legend; it was a great opportunity to hear his thoughts." Tiburon's Managing Principal, Chip Roame applauded the effort; saying, "Myron's challenge is just what the CEO Summit needs to make all of us think innovatively." Mr. Scholes was introduced by Tif Joyce (President, Joyce Financial Management). General Session Panel Discussions Four general session panel discussions were held, including the popular Ask the Consumers and Ask the Advisors panels, as well as a panel on opportunities in the investment management market, and a panel discussing the rapid growth of fee-only financial advisors (RIAs) led by the heads of the major custodians. All four panels included wide-open dialogue and received wide praise. Ask the Consumers As has become tradition at Tiburon CEO Summits, four high net worth consumers, including one married couple, joined facilitator Tif Joyce (President, Joyce Financial Management) on the Ask the Consumer panel. The panelists told about their experiences with brokers, bankers, insurance agents, independent advisors, and do-it-yourself approaches, making four key points: Financial advisors can permanently turn off clients with arrogant attitudes, and a substantial number of high net worth investors do not use financial investors. Three of the four randomly chosen high net worth panelists did not currently utilize financial advisors, which surprised many attendees, but is in-line with Tiburon research (frankly amongst the nineteen high net worth consumers randomly chosen to participate on the Ask the Consumer panel at the last five Tiburon CEO Summits, ten (or 53%) have been self-directed and nine (or 47%) have utilized financial advisors) Losing confidence in making your own decisions about your finances can be stressful. "I made a lot of mistakes along the way and I wish I could change what I’ve done,” said one panelist The financial world is getting more intimidating as baby boomers age into retirement. One consumer panelist said that "we’re living longer and have to spend more time planning for retirement savings and healthcare" Consumers do want trusting advisors. Trust is the overwhelming key component to a successful advisor/client relationship. The panelists said that taking the time to understand their personal situations and knowing their advisors really care goes a long way toward building trust. One consumer stated, "you have to prove to me that you really care about me rather than making money for yourself" The attendees enjoyed the Ask the Consumers panel; Dave Petersen (President, Financial Services Advisory) said that, “we all need to look to the end users to direct what we do.” Tiburon's Managing Principal Chip Roame agreed, saying, "unlike consumer goods, the financial service industry has never had a productive customer research orientation." Ask the Advisors With a similar goal to the Ask the Consumers panel, four leading financial advisors participated on the Ask the Advisors panel to allow attendees to better understand advisor decision-making. Facilitated by Dennis Clark (CEO, Advisor Partners), the panelists included Kurt Brouwer (CEO, Brouwer & Janachowski), Tom Lydon (President, Global Trends Investments), Dave Petersen (President, Financial Services Advisory), and Alan Spiegelman (Wealth Management Advisor, Northwestern Mutual), who collectively manage over $1.3 billion. The panelists had some similarities and other differences. Their assets under management ranged from $625 million (Brouwer & Janachowski) to $65 million (Global Trends Investments). Three of the four (Financial Services Advisory, Northwestern Mutual, and Global Trends Investments) served primarily individual clients, while Brouwer & Janachowski served 50% institutional clients. Brouwer & Janachowski and Northwestern Mutual both had average account sizes of ~$2.0 million, while Financial Services Advisory and Global Trends Investments ranged between $600,000 and $800,000. All primarily relied on mutual funds and exchange traded funds, with Northwestern Mutual having the largest use of individual securities at 20% All of the panelist agreed that they are correctly labeled as wealth managers but that the scope of their services is a function of their clients’ demands. Importantly, the range of services offered is linked to the size and profitability of the relationships. Mr. Petersen observed that larger relationships are not necessarily profitable relationships. His firm monitors hours spent to service accounts and often revises pricing for larger, service-intensive relationships to ensure profitability. In addition to discussing wealth management, the panelists were queried on whether they ran practices, or businesses. Mr. Spiegelman set a tough standard by saying that his is a business, and cited as an example how smoothly his firm runs during his extended absences, while Mr. Petersen, who considers his firm to be both a practice and business, said that taking long vacations poses a bit greater challenge for him, suggesting his might be more of a practice in the final analysis. In assessing the state of their businesses, all of the panelists agreed that one of the biggest challenges is managing the growth of their practices and finding talented people to bring into their organizations. Mr. Brouwer explained the need for getting the best talent in their small firms, and noted that his firm recently hired a middle level manager only after reviewing 60 candidates. In order to stay abreast of trends, products, and issues, the panel cited a number of helpful steps. Mr. Lydon pointed out the efficiency of using Tiburon’s research and its CEO Summits to get a useful perspective on advisor market issues. Mr. Spiegelman, agreed and added that questioning clients directly was a great benefit. When asked to predict changes in their businesses in the next five to ten years, Mr. Petersen predicted that technology advances would enable economical delivery of more tailored customized solutions for advisors. Mr. Brouwer’s firm has embraced technology through telecommuting, and in fact Kurt himself is able to work three weeks per month from Hawaii, while serving clients in real time as if he were in his office in Tiburon. Overall, panelists agreed with Andrew Rudd's (CEO, Advisor Software; Chairman, Advisor Partners; and Founder & Former CEO, Barra) emphasis from earlier in the day, that as the advisor market evolves, wealth mangers will have to better utilize available technology in order to grow their businesses. The market is extremely competitive and establishing and sustaining competitive points of difference will be critical to both survival and growth. Mr. Lydon predicted that the market will continue to bifurcate with some advisors being more client centric, allowing for a better accommodation of lifestyle needs for advisors like himself, while others would be more business focused and would continue to grow share. Tiburon's Managing Principal Chip Roame agreed, saying that, "there is an inaccurate message going around that small advisors' existing client bases are under threat; this simply is not supported. They may not grow as fast as others but I am not sure that their client bases are under threat." The Investment Management Market Tiburon CEO Summit XI Investment Management Market general session panelists, Chuck Baldiswieler (Trust Company of the West (TCW), Societe Generale), Karl Mills (Jurika, Mills, & Keifer), and Jud Bergman (Envestnet Asset Management) address the future of the investment management business Tim Armour (Managing Director, Morningstar) facilitated the Investment Management panel, which included Chuck Baldiswieler (Group Managing Director, TCW Advisor Group & Private Client Services, Trust Company of the West (TCW), Societe Generale), Jud Bergman (CEO, Envestnet Asset Management), Ron Cordes (Chairman, Asset Mark Investment Services, Genworth Financial), and Karl Mills (President, Jurika, Mills, & Keifer). Mr. Armour pointed the discussion towards trends from the panel’s perspective, and Mr. Cordes zeroed in on “baby boomers moving into the next phase of life, and their need for results-based planning.” Mr. Baldiswieler picked up on that by discussing his firm’s efforts to “focus on outcomes at the client level” and “worrying less about style.” The group all agreed that specialization and technology will continue to be prevalent themes, and Mr. Bergman said that, “the trick will be to tie front-end financial planning to results-based reporting.” On the business side, Mr. Cordes commented that, "rather than worrying about disappointments with the market and rising business costs, investment managers should be looking ahead. Over the next decade, the combination of demographic changes, shifting investor demand, and a changing regulatory landscape will create opportunities for those managers who are equipped to compete." Perhaps the most insightful comment of the session came from Mr. Mills, recently returned to the investments business after a three year stint as the president of the San Francisco Opera, who, reflecting on the earlier Ask the Consumer panel, said, “it’s never been cheaper to do yourself harm than it is today.” Others agreed, saying all advisory models would likely grow in the future. Tiburon's Managing Principal Chip Roame noted that, "the ability to capture the liquification and deliver against the retirement income challenge may be what separates the winners from the losers in the next decade in the investment management market." Innovative Business Models: Competing for Custody in the Booming RIA Market Because of the boom in the fee-only financial advisor business in recent years, the innovation panel was focused on custodians serving fee-only financial advisors. The panel, facilitated by Chip Roame (Managing Principal, Tiburon Strategic Advisors), offered the perspective of all the leading industry custodians. While representing five of the six-or-seven largest traditional custodians, the panelists represented varying sized and focused businesses. The Charles Schwab Corporation custodies for 5,200 fee-only financial advisors with $468 billion in assets ($85 million average). TD Ameritrade custodies for a similar number of fee-only financial advisors (4,236), but with far fewer assets ($58 billion) and a much lower average account size ($14 million). The other three panelists represented firms closer to the size of TD Ameritrade. Fiserv Investment Support Services serves 500 fee-only financial advisors with $16 billion assets ($32 million average); Pershing serves 450 fee-only financial advisors with $50 billion assets ($125 million average); and The Bear Stearns Companies serves 98 fee-only financial advisors with $45 billion ($550 million average). The Charles Schwab Corporation and TD Ameritrade have balanced asset mixes (52%/48% and 46%/44%) between individual securities and mutual funds & exchange traded funds, while Fiserv Investment Support Services is more heavily weighted to mutual funds & exchange traded funds (80%), and both Pershing and The Bear Stearns Companies custody more individual securities (79% and 75% respectfully). In the discussion, Randy Merk (President, Schwab Financial Products, The Charles Schwab Corporation) who pinch hit for his peer Debby McWhinney (President, Schwab Institutional, The Charles Schwab Corporation), said that Schwab continues to innovate in financial products for financial advisors. Tom Bradley (President, TD Ameritrade Institutional Services, TD Ameritrade, TD Group) noted the success of his firm's recent merger. Skip Schweiss (Executive Vice President, Fiserv Investment Support Services, Fiserv) detailed his firm’s innovations in custodying unique assets. John Iachello (Chief Operating Officer, Pershing Advisor Solutions, Pershing, Bank of New York) pointed out Pershing & Bank of New York's broader capabilities and John Tyers (Managing Director, Broker/Dealer Clearing & Investment Account Services, The Bear Stearns Companies), detailed some of the cost and pricing innovations that have led to Bear Stearns' success with larger advisors and hedge fund managers. The group also noted the substantial assets held by other custodians. Tiburon's Managing Principal Chip Roame agreed, saying that, "the custodians at the table, even when including Fidelity Investment's ~$130 billion of assets control $767 billion or only 70% of the market." Ken Fisher (CEO, Fisher Investments) chimed in saying that the largest custodians for his $32 billion firm include UBS, Smith Barney, and US Bancorp (none of which were on the panel). Break-Out Sessions Nine break-out sessions were held, allowing attendees to more informally debate trends and business strategies. Each session included no more than thirty attendees, promoting frank discussions on a wide variety of topics. The sessions were kicked off with brief presentations of Tiburon research related to each break-out session topic. Top financial industry executives such as Tim Armour (Managing Director, Morningstar), Dennis Clark (CEO, Advisor Partners), Tif Joyce (President, Joyce Financial Management), Tom Lydon (President, Global Trends Investments), Kirk Michie (Managing Director, Lenox Advisors), and David Smith (Group Publisher, Financial Advisor Magazine, Charter Financial Publishing Network), facilitated the break-out sessions, ensuring that the discussions remained lively and focused on high-level topics. Tiburon's Managing Principal Chip Roame circulated in an effort to add Tiburon research-based insights to each discussion. The break-out sessions were grouped into three broad categories - products, markets, and advisors issues. These sessions will be the focus of next week's Tiburon research release; if you are in a hurry, please click the links below to view detailed highlights of these nine sessions: Product Break-Out Sessions Market Break-Out Sessions Advisors Break-Out Sessions Sales & Marketing Benchmarking & Best Practices Mergers & Acquisitions Mutual Funds & Exchange Traded Funds Separately Managed Accounts & Other Fee-Account Programs Hedge Funds, Venture Capital & Private Equity, Real Estate, & Other Alternative Investment Consumer Wealth, Liquefaction, & the Retirement Income Challenge Captive Advisors (Including Brokers, Private Bankers, & Insurance Agents) Independent Advisors (Including Fee-Only Financial Advisors & Independent Reps) The attendees enjoyed the break-out sessions; Dave Petersen (President, Financial Services Advisory) said that, “the break-out sessions allowed us to talk to each other and roll-up our sleeves.” General Feedback General feedback for the CEO Summit included overwhelmingly positive comments. The balance of general session speakers, general session panel discussions, & break-out sessions, the diversity of content, and the personal interaction were all frequently complimented. Some of the highlights for attendees included: The state of the financial services industry keynote speech by Tiburon's Chip Roame, and the guest presentations by David Carroll, Ken Fisher, Lee Kranefuss, Andrew Rudd, and Myron Scholes The consumers panel, which highlighted the industry’s need to better understand client needs, and the advisors panel that allowed attendees to better understand the thought process of leading financial advisors The RIA custodians panel that drew attention to this fast growing segment And the group dinner held in Tiburon, CA, which fostered informal conversations amongst leaders across dozens of traditional market segments Andy Putterman (President, Fortigent, Lydian Trust Company) summed it up well by saying, “well done on all accounts – I met a ton of great people and came away with a number of interesting ideas for our business.” Allen Thorpe (Managing Director, Hellman & Friedman) added, “great event; I really enjoyed it. It is a good group that you are able to pull together, and a productive forum.” And Mitch Politzer (CEO, First Ameritas Life Insurance Company, Unifi Mutual Holding Company) added, “thank you for a spectacular conference – content, networking, and some new friendships.” 2007 - 2009 Tiburon CEO Summits Tiburon will continue to hold semi-annual CEO Summits in 2007 - 2009. Dates are April 18-19, 2007, October 10-11, 2007, April 9-10, 2008, October 15-16, 2008, April 8-9, 2009, and October 7-8, 2009. Spring 2007 speakers include John DesPrez (CEO, John Hancock Financial Services, Manulife Financial), Steve Lockshin (CEO, Lydian Wealth Management, Lydian Trust Company), Jim Riepe (Retired Vice Chairman & Senior Advisor, T. Rowe Price Group), Paul Schott Stevens (President, Investment Company Institute), and others to be announced. Fall 2007 speakers include Stephanie DiMarco (CEO, Advent Software), Mike Fraizer (CEO, Genworth Financial), George Gatch (CEO, JP Morgan Funds Management, JP Morgan Chase), and others to be announced. Spring 2008 speakers include John Hailer (CEO, IXIS Asset Management Advisors, Groupe Caisse D'Epargne) and others to be announced. All of these CEO Summits will be held at the Ritz Carlton Hotels. ******************************************************************************* Tiburon Strategic Advisors