Tiburon Releases 2006 Year-End Letter

Context Setting

Tiburon regards its working relationship with its clients as a partnership; the firm’s success is closely intertwined with that of its clients. Accordingly, Tiburon has promised to keep its clients (and some select prospects) in the loop on its industry views and the firm's developments in the form of this annual letter.

This past year saw a variety of interesting industry developments. The upturn in the stock market and the beginning of baby boomers' retirement are reasons for celebration. The corresponding improvement in investor (and industry) sentiment was a positive influence. However, continued scandals cause concern. Consumers still seem skeptical of parts of the financial advice industry. And firms still seem confused by basic industry facts, promulgating numerous industry myths. Tiburon remains convinced of the enormous potential for the brokerage, investments, wealth management, and advice industry, but thinks that, in many cases, additional research may lead to better strategies.

Against this backdrop, Tiburon had an excellent year in 2006, executing its core business strategy centered on its Market Research & Strategy Consulting services; its Market Seminars & Conference Speeches; its Research Reports, Research Report Retainers, & Database Access Program; its CEO Summits; its Benchmarking Tools; its Research Releases; and its Consulting Staff & Executive Programs.

Industry Developments

It is becoming increasingly difficult to separate the various parts of the financial services industry but numerous financial trends appear to suggest a positive future for the advice business across traditional industry lines.

Industry Foundation

The demographics behind baby boomers should continue to strengthen the investing side of the financial services industry. Four points are critical to understand:

The baby boomer generation includes folks who were born between 1946 and 1964; in other words, if you are 42 to 60 years old, you are a baby boomer. The first impact of this fact is that baby boomers are squarely in their peak earnings years. Having had a relatively low savings rate over the past decade, this should lead to increased savings, more investable assets, and better times for the advice business
If you are able to look out far enough, you can see that if you speed up the calendar ten to fifteen years, then baby boomers will be from 52 to 70. At that time, many will be well into retirement, and liquefaction will become rapid. What does liquefaction mean? This is the term used to describe households liquefying their assets - rolling over their 401K plan balances to IRAs, selling the businesses that they have built, selling their larger houses and trading down to golf course condos, etc. All of these events liquefy (or free up) assets to be reinvested, most likely in financial assets, creating a second reason that it is good to be in the advice business
Beyond the liquefaction years, the industry may possibly face a retirement income crisis and most certainly will face new challenges around retirement income planning. Consumers are retiring earlier and living longer, creating a need for product innovation beyond traditional annuity products. This is a third exciting reason to be in the advice business. Fidelity Investments seems to already be a leader in this space. New products from Asset Mark and Jefferson National's no-load annuities are both innovative
Toward the end of the retirement income planning phase, many consumers will look towards estate planning and charitable giving, giving a boost to both trust accounts and life insurance products. Depending on the evolution of the estate tax, Tiburon expects substantial growth in the number of trust accounts and growth in the life insurance business. These dual trends will redefine the advice business from one about investment management to one about wealth management

At Tiburon's recentley held CEO Summit XI, Tiburon's Managing Principal Chip Roame started by suggesting that five recent news stories and five recent Tiburon research findings are worthy of broad consideration:

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 Tiburon CEO Summit XI 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 (MFS Investment Management was later pulled off of the market)
Product proliferation continues in the mutual funds, exchange traded funds, & hedge fund industries, suggesting opportunities for consolidation (Chip 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 (note: Bank of America's market capitalization has subsequently surpassed that of Citigroup)
Venture capital & technology has entered round two of funding (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 has passed Merrill Lynch as the largest financial services firm based on client assets (over $1.5 trillion!), signaling the impact of fast growing business models such as no-load mutual 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 has 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 continue 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

Strategic Industry Developments

On the industry side, the banking, brokerage, and insurance industries continue to come closer together and yet struggle to execute successful business models:

Size seems to be at a premium. In banking, full-service brokerage, discount brokerage, insurance, and investment management, mergers are being undertaken that make the largest firms many multiple times the size of even their eighth and tenth largest competitors
After having picked up many regional and boutique brokerage firms in the late 1990s, many banks seem focused now on acquiring mutual fund companies, insurance agencies, and fee-only financial advisors
Meanwhile some past acquisitions are being undone (e.g., Morgan Stanley's pending sale of Discover)
Frankly, corporate size and structure may have little to do with the delivery of world-class advice. While large multi-faceted financial institutions will have many inherent advantages (e.g., brand names, marketing budgets, and branch structures), independent advisors may compete head-to-head with the largest financial services firms through a combination of deep client relationships and strategic alliances, allowing them to deliver broader product lines

Tactical Trends Around Delivering Advice

The net result is that all financial services firms seem focused on the high net worth consumer market, the advice business, and the potential for delivering integrated wealth management capabilities. Some of the tactical trends include:

The rapid growth of fee-accounts and specifically separately managed accounts, which appear to be slowly becoming the dominant investment models for emerging affluent investors
The polarization of the investment process, with both the emergence of a wide range of alternative investment vehicles, which are being used by some leading-edge advisors, as well as the movement to more fully utilize index mutual funds & exchange traded funds by other advisors
The movement by other advisors to reposition themselves as wealth managers, focusing a bit less on the leading-edge investment vehicles and a bit more on account aggregation, financial planning, insurance, and other related services

All of these trends should continue over the next few years and Tiburon believes that the advice industry will broadly transform itself in many positive ways. Advice models that remove conflicts-of-interest, create fiduciary responsibilities, and put qualified advisors in advice-giving roles will win.

Tactical Trends Around Business Building

Front line financial advisors also face a series of tactical trends in managing their own businesses:

A refocus on sales & marketing after the run up of the late 1990s, when marketing was not required, and then the downturn of the 2000-2003 period, when marketing was not desired
A focus on the broad swath of new technologies, including competitors to CheckFree APL, Advent Axys, and other dominant industry players. This area is attracting substantial venture capital investments
The increasing focus of individual advisors and broader financial advisor groups on benchmarking their business practices in areas ranging from technology use to sales & marketing strategies to financial performance ratios
A renewed focus on compliance. The regulatory environment is just beginning to pick up momentum; Tiburon expects increased oversight and government involvement, including possibly more involvement by state agencies
And finally, the continuing emergence of the succession planning issue in the independent advisor markets and the emergence of some real acquisition activity amongst larger firms

Challenging the Assumptions

Subsequently, at Tiburon's recently held CEO Summit XI, Mr. Roame offered up challenging questions to be raised in each of the nine break-out sessions. These questions seem like they would make a good agenda for an executive offsite or board meeting at almost any Tiburon client:

Markets Break-Out Session: Consumer Wealth, Liquefaction, & the Retirement Income Challenge

Does the US face a major savings crisis or not?
Is the savings rate accurately counted (and is this relevant)?
Will the savings rate increase as baby boomers age?
Will the wealth transfer from baby boomers’ parents to baby boomers be substantial?
Will the liquefaction bail out most baby boomers?
Do IRA rollovers present the biggest opportunity for most financial advisors (or are most rollovers too small)?
How will the industry address boomers' retirement income needs – annuities, reverse mortgages, etc.?

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 independence 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)?

Products Break-Out Session: Mutual Funds & Exchange Traded Funds

Are mutual funds dead (or are they America’s core financial product)?
Do the discussed sales of MFS & Putnam represent the death of the traditional model (or do they represent a reaction 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 account 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 market exits by 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 industry's 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)?

Advisors Break-Out Session: Sales & Marketing

Should financial advisors target the high net worth market ($1 million+) or stay focused on more moderate net worth households ($100,000-$1 million)?
Will various sources of the liquefaction of baby boomer wealth (e.g., rollovers, business sales, house downsizing) dominate available investable assets?
Are baby boomers in mass receiving substantial wealth transfers from their parents?
Are financial advisors too reliant on passive client referrals?
What are some strategies for proactively seeking client referrals?
Do financial advisors invest too heavily in seeking professional referrals (and will more of those professionals soon be their competitors)?
Do any direct marketing strategies work (e.g., cold calling, direct mail, internet & traditional advertising, seminars)?
Why do so few advisors rely on public relations campaigns (and don’t they have substantial upside)?
Why do so few advisors rely on target market programs (and don’t they have substantial upside)?

Advisors Break-Out Session: Benchmarking & Best Practices

How can profitability be increased?
Is there evidence that more partners leads to more profits (specifically more profits per partner)?
Is there economic value in adding employees?
Why do so few advisors broadly leverage technology?
Is outsourcing growing?
Why are client satisfaction surveys used so infrequently?
Are financial advisors managing correctly for profits (or are some stuck on profit margins)?

Advisors Break-Out Session: Mergers & Acquisitions

Is there actually any substantial number of financial advisory firms being sold now?
Is there an equal number of buyers and sellers?
Are the available businesses typically of substantial size?
Are financial advisors finally taking succession planning seriously?
Will many financial advisors never retire (die with their boots on)?
Will most deals continue to be internal deals at low valuations?
Will larger fee-only financial advisors find secondary markets for their firms at banks and CPA firms?
How successful have the roll-ups (National Financial Partners), banks (Silicon Valley Bank), and CPA firms (Moss Adams) been as acquirers?
Who are the new entrants with interesting models (e.g., Fisher Investments, Boston Private Financial Holdings, Focus Financial Partners)?
Why is there so much debate regarding valuation methods (isn’t discounted cash flows the only logical way to value any ongoing concern)?
Will valuations decline as more baby boomer advisors reach retirement age?

Conclusion

In short, Tiburon acknowledges some continuation of the short-term challenges in the current environment in the financial services market but Tiburon also thinks that the future of this industry is exceedingly bright. Firms need to develop comprehensive business strategies to serve more knowledgeable and more battle-scarred investors as the exciting peak earnings years and peak liquefaction years are now on the near-term horizon.

Tiburon Strategic Advisors

Tiburon had a very successful year in 2006. Tiburon’s success revolves around a half-dozen key activities that may present opportunities for many of the firm’s clients:

Market Research & Strategy Consulting

Tiburon has served almost 300 corporate clients and the firm surpassed 900 projects completed in 2006. Tiburon executives find it amazing that the firm has been engaged by almost 300 different financial services firms. But the firm is even more proud of the repeat use ratio – having completed, on average, over three projects for each corporate client. Tiburon’s research-based business model allows it to help on nearly any strategic issue in the financial services industry and the firm’s consultants enjoy the challenges. Challenging projects in 2006 included research of advisors selling their businesses, independent reps responding to compliance issues & fee-based brokerage account regulations, banks offering alternative investments, full-service brokerage firms evolving their core models, and numerous firms interested in participating in China. Furthermore, Tiburon’s wide client network can be useful in many regards. For instance, Tiburon was engaged by one client in 2006 to assist in raising venture capital from other interested Tiburon clients, and other clients have engaged the firm for introductions to potential strategic alliance partners.

Market Seminars & Conference Speeches


	Tiburon continues to focus on developing broadly documented research as its first priority. As a result, firms looking to quickly get up to speed on specific topics need not hire Tiburon for any extensive project but rather can have a Tiburon principal and research manager in for a one-day market seminar ($15,000 to $25,000 plus travel for its managing principal) or engage a Tiburon principal or research manager ($15,000 plus travel for its managing principal) for a conference speech. This research-orientation allows the firm to focus its time on longer-term projects whereby it can help clients build more customized leading-edge business strategies around previously researched industry trends.

Research Reports, Research Report Retainers, & Database Access Program

Tiburon continues to focus on research as its first priority. aiming to continually publish research on leading-edge industry topics and to attempt (over time) to make each report comprehensive. The firm published seven new research reports and two updated research reports in 2006. These research reports included Exchange Traded Funds & Other Market Linked Products, Insurance Products & Risk Management, the Online Financial Services Market, the English Speaking Countries Markets, the Latin America Markets, Offshore Markets, and Technology Development. As a result, firms looking to quickly get up to speed on specific topics need not hire Tiburon for any extensive project but rather can buy a research report ($5,000). Tiburon's twenty-six existing research reports include:


		English Speaking Countries Markets Latin America Markets Offshore Markets Financial Advisor Benchmarking & Best Practices Technology Developments Financial Advisor Mergers & Acquisitions Independent Rep Best Practices Fee-Only Financial Advisors (RIA) Best Practices Tax Pro Best Practices
Future of Advice Consumer Wealth & Target Markets Institutional Mergers & Acquisitions Mutual Funds Separately Managed Accounts & Other Fee-Account Programs Exchange Traded Funds & Other Market Linked Products Hedge Funds Venture Capital & Private Equity	Real Estate Other Alternative Investments Insurance Products & Risk Management Estate Planning & Charitable Giving Independent Advisor Life Insurance Strategies Independent Advisor Trust Services Strategies Online Financial Services Market Independent Rep & Independent Broker/Dealer Market CPAs & Tax Pros Market

At the suggestion of numerous Tiburon clients, Tiburon recently created a new client service allowing unlimited access to all of its research reports published in a calendar year (delivered online) for only $25,000. This service has helped numerous Tiburon clients, including Ever Bank Financial, Fidelity Investments, Groupe Caisse D’Epargne (CDC IXIS), Morgan Stanley, Morningstar, SEI Investments, Societe Generale (TCW), UBS (UBS Financial Services), and Wells Real Estate Funds, consolidate their research needs and budgets.

To subscribe to the Tiburon Research Report Retainer Program or to address your company's research needs for 2007, please contact Brian Cotter at BCotter@TiburonAdvisors.Com.

Tiburon is also preparing to soon offer easier access to its industry leading database of over 200,000 contacts, primarily various types of financial advisors and executives at financial services companies. Many Tiburon clients have benefited from purchases of all or a portion of this database through Tiburon's database access program. If you are interested in learning more, please contact Brian Cotter at BCotter@TiburonAdvisors.Com.

CEO Summits

Tiburon held its CEO Summits X and XI in San Francisco, CA in April and October of 2006; CEO Summit XII is planned for April 2007 at the Ritz Carlton Hotel in San Francisco, CA. The semi-annual CEO Summits of up to 100 executive-level Tiburon clients is believed to be a relatively unique cross-industry CEO forum within the financial services industry. At these Summits, Tiburon consultants present Tiburon research and facilitate open discussions about leading-edge industry issues. These semi-annual get-togethers are proving to be a real benefit to working more closely with Tiburon clients.

Attendees at Tiburon's CEO Summit XI held October 18-19, 2006 in San Francisco, CA

Tiburon's CEO Summits could not be planned without a lot of help from many others. The Tiburon CEO Summit Planning Committee members invest dozens of hours into securing guest speakers, nominating & confirming attendees, and facilitating & writing-up sessions. Tiburon is grateful for their help. To hear more about their experiences at prior Tiburon CEO Summits or to get answers to questions on how to earn invitations for the executives of your firm, please contact any of the Tiburon CEO Summit Planning Committee members:


		Kirk Michie David Smith
Tim Armour John Cammack Dennis Clark	Tif Joyce Tom Lydon Kevin Malone	Kirk Michie David Smith