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Context Setting
Greetings from the beaches of the small island of Lanai in Hawaii! Tiburon regards its working relationship with its clients as a partnership; the firm’s success is closely intertwined with that of its clients and the projects on which it works. 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. If you are not interested in receiving such, just let us know and we will drop you from this distribution list.
On the industry front, this past year saw a variety of interesting industry developments. The beginning of baby boomers' retirement unlocks enormous wealth and presents unprecedented asset gathering opportunities. However, firms still seem confused by basic industry facts, promulgating numerous industry myths. Furthermore, firms continue to take significant risks in businesses that seem to almost always blow up, giving back all previously generated revenues (e.g., compare the level of write offs in the current sub-prime mortgage crisis to the aggregate revenues previously generated by those businesses at those firms). Tiburon remains convinced of the enormous potential for the brokerage, investments, wealth management, and advice industry, but thinks that, in many cases, an increased consumer orientation and additional research may lead to better strategies.
Against this backdrop, Tiburon had another terrific year in 2007, executing its core business strategy centered on its market research & strategy consulting services, with its revenues up 40%. The firm completed its 1,000th client project, delivered dozens of market seminars & conference speeches, held Tiburon CEO Summits XII and XIII, introduced its research report retainer & database access programs, exceeded 5,000 users in its financial advisor benchmarking tools, released seven new and eleven updated research reports, hired six new research managers and expanded its consulting fellows program.
State of the Financial Services Industry
At Tiburon CEO Summit XIII, held in October, I laid out a synopsis of the past six months' most newsworthy events and most insightful Tiburon research findings, outlining my expectations for the state of the financial services industry over the coming years, as consumers liquefy their assets but the competitive playing field gets more heated; those comments seem to be a relevant part of a year-end synopsis:
Key Drivers
- Consumer households control almost three-quarters of all investable assets, more than half invested via financial advisors
- Many baby boomers face a retirement income challenge for five reasons, including the elimination of many defined benefit plans and the challenges faced by the social security & medicare systems
- Three-quarters of baby boomers over the age of 55 have less than $100,000 in investable assets and the consumer households savings rate continues to hit new all time lows
- For many baby boomers, their biggest risk is now that they will live too long, with estimates that more than half of 65 year olds will reach age 85 and over one-third will reach 90; amongst 65 year old couples, there is a 50% chance that one (or both) will live another twenty-five years
- With all that said, consumer households have almost $23 trillion of investable assets, $35 trillion of financial assets, and $70 trillion of total assets, with an important distinction between the high dollar average and the much lower median amounts
- Hence, the solution to the perceived savings crisis will be baby boomers' liquefaction of their retirement plan assets, personal assets, and other illiquid assets, such as the rollover of 401k plan balances, the sale of houses, and the sale of private businesses
- The oldest baby boomers become eligible for social security in 2008
Products & Services
- Mutual funds are the dominant investment product ($10.8 trillion assets), experienced record growth in 2007, and are used heavily by both the fast growing independent rep and fee-only financial advisor markets (39% & 61% of assets respectively) suggesting that mutual funds aren't going away, even if much of the reporting and media focus is on other products, including exchange traded funds, separately managed accounts, and hedge funds. The facts ($10.8 trillion in mutual funds versus ETFs at $608 billion & separately managed accounts at $800 billion) require us all to maintain perspective
- There is some trend to packaged solutions; for instance, target date mutual funds have quickly gathered over $100 billion (although it appears that consumers are misusing these funds, mixing them into portfolios containing other funds, hence altering their overall asset allocations)
- Packaged fee-account assets have grown substantially over the past eight years to over $1.5 trillion but wirehouses' client assets are still just 15% in fee-account programs and similarly only 16% of independent rep client assets are in fee-account programs; amazingly, banks have done slightly better with 17% of their client assets in fee-based trust accounts but only 4% of bank trust department assets are invested with third-party managers. Furthermore, the key products in the wirehouse channel are evolving quickly, with fee-based brokerage accounts giving way to broker wrap accounts (due to the abolishment of the Merrill Lynch rule) and separately managed accounts giving way to unified managed accounts (due to the later being a superior product platform)
- More broadly, the investment process is being polarized with twin growth patterns in both market-linked products and alternative investments. Exchange traded funds may be the fundamentally most important product invention since the mutual fund in 1940 and may ultimately shift many financial advisors' role to that of managing a series of index products and focusing excess time on delivering a broader set of wealth management services
- Similarly, dozens of firms are entering into the hedge funds business - Citigroup purchased one-year old Old Lane (and its CEO became the CEO of the entire bank a few weeks ago!) and Morgan Stanley has acquired multiple hedge fund firms. I also took note that the attendees at a recent SEI Investments conference maintained an impressive focus on revenues, which they noted are increasingly driven by their lower asset hedge funds. That said, journalists seem to send misleading messages as few financial advisors utilize hedge funds for their high net worth clients
- Overall, consumers and institutions may boost their demand for performance based funds
- Meanwhile, the investments decision is shifted from financial advisors to institutional go-betweens
- Investments may matter less than wealth management services as baby boomers move from the liquefaction & retirement income challenge years into either their health care & retirement income challenge years (for the less affluent) or their estate planning & charitable giving distribution years (for the more affluent). For instance, many baby boomers face a health care crisis, with up to 50% likely to require nursing home care but only 7% owning long-term care insurance. Similarly, the fast growing independent rep market puts almost one-third of its client assets in annuities, but over three-quarters of annuity sales represent transfers from existing policies
- More affluent households will unlikely have retirement income or health care insurance issues but will instead be faced with issues surrounding the most tax-efficient estate planning & charitable giving methods. The brokerage firms have moved to license their reps to sell insurance (69%) but few have yet done so (15%). And amazingly, more that half (58%) of consumers still lack a basic will
Markets & Distribution Channels
- Close to 400,000 financial advisors are in the market, including about equal numbers of wirehouse & other employee brokers (92,000), life & property & casualty insurance agents (87,000), bank brokers & trust officers (82,000), and independent reps (also 82,000)
- The number of independent advisors (the combination of independent reps and fee-only financial advisors) has far surpassed the number of wirehouse & other employee brokers (112,000 versus 92,000), and the number of independent reps alone will soon surpass the number of wirehouse & other employee brokers (currently 82,000 versus 92,000). Will the smaller independent reps who serve more of a mid-market clientele ever surpass the assets under management of the wirehouses? What will it take? Continual weeding out of low end reps? A substantial break-away broker trend? Alternatively will the banks rebound? Will they leverage their brand names with the next generation of investors or will they buy back their assets they lost to brokers and independent financial advisors?
- Mutual fund and other product companies have to take note of the non-US markets. Globally, the mutual fund industry expanded by over $3 trillion in 2007 and investors worldwide now entrust over $27 trillion to mutual fund managers
- Wirehouses and retail banks continue to dominate control of consumer investable assets (31% and 27% respectfully) but independent advisors continue to outgrow the competition (18% asset growth rate for fee-only financial advisors and 14% for independent reps)
Tactical Issues
- On a more tactical level, many financial advisors have focused their energies on the 40 million households (out of 117 million) that control 90% of all investable assets ($19.8 trillion out of $22.8 trillion) . While almost all industry executives are trying to push financial advisors to serve higher net worth clients, the fast growing independent rep channel has an average account size of just a modest $142,000
- As competition heats up, the game will increasingly be won through marketing. Client retention and consolidation is now more critical as baby boomers liquefy their wealth. Similarly, client referrals appear to account for 55% of incremental new clients. And on an incremental basis, few financial advisors utilize target market strategies, even though these techniques have proven to lead to increased numbers of referrals, result in higher close rates, and lower costs to serve clients
- Technology has become a great equalizer across many segments of the industry. Both large and small banks and mutual fund companies are able to compete, and technology has empowered the independent financial advisor industry, eliminating the need for financial advisors to be employed at large firms
- Aside from technology, people are the key leverage point across many industry segments. Investment professionals determine the success of client portfolios; distribution professionals increasingly lead many of the firms; and individual financial advisors increasingly control their clients
- Numerous financial advisor merger & acquisition models are finally gaining some traction, with National Financial Partners long term success and multiple acquisitions by Focus Financial Partners being held out as examples. Other firms like Fiduciary Network, United Capital Partners, Wealth Trust, and Fisher Investments also appear to be well capitalized. Other exciting transactions included the merger of Kochis Fitz and Quintile Wealth Management, and City National Bank's acquisition of Lydian Wealth Management
Strategic Conclusions
- Industry troubles seem to continue. At year end the issue is sub-prime mortgages, but this has followed the stock analysts, mutual funds late trading, insurance kick-backs, and other issues in recent years. Banks and other firms are now having to cut back in wealth management at an inopportune time. When will financial services CEOs learn to pass on exotic strategies and focus on the low risk strategy of capturing baby-boomers’ liquefaction? Is the propensity to take risks related to the high bonus structure popular on Wall Street? Will effecting changes to these strategies require a change in compensation systems? Citigroup, Merrill Lynch, & E*Trade have recently replaced their CEOs, and other senior executives have taken the fall at their firms (e.g., Zoe Cruz at Morgan Stanley)
- Fidelity Investments recently surpassed Merrill Lynch as the largest financial services firm when ranked by client assets, and The Charles Schwab Corporation will also surpass Merrill Lynch at current growth rates in two-to-three years, calling into question the typical definitions of advice & guidance and further evidencing the growth in new channels (e.g., discount brokerage, fee-only financial advisors, and independent reps). Have Schwab, Fidelity, and others redefined baby boomer investment advice?
- Meanwhile, the focus on eliminating (perceived) conflicts of interest, with two full-service brokerage firms exiting the investment management business, has stalled. I encourage you to consider Smith Barney's & Merrill Lynch's strategies versus those of Morgan Stanley, Wachovia Corporation, & UBS, which appear to be increasing their bets on asset management and, inturn, retaining much higher profit margins
- There is also a substantial bifurcation happening in the asset management business, with a handful of firms (e.g., American Funds, Vanguard, Fidelity Investments) exceeding $1 trillion assets under management, but 84% of all mutual fund companies managing less than $10 billion. And overall there has been more bad news for product companies as distribution continues to take power from manufacturing, with recent models - only multiple style portfolio programs being a key example
- Meanwhile, brokers and fee-only financial advisors (RIAs) have been put on the same playing field with the elimination of the Merrill Lynch rule
- Financial services company stocks look inexpensive, with banks having been particularly hard hit
- Industry mergers & acquisitions continue at all levels of the industry with Power Corporation of Canada's acquisition of Putnam Investments, Security Benefit Group's acquisition of Rydex Investments, TD Bank Financial Group's acquisition of Commerce Bank, Bank of America's acquisition of US Trust, Merrill Lynch's acquisition of First Republic, TD Ameritrade's acquisition of Fiserv's custody business, Fiserv's subsequent acquisition of Check Free, the Bank of New York's acquisition of Mellon Financial, Genworth's acquisition of Liberty Reverse Mortgage, and State Street Corporation's acquisition of Investors Bank & Trust representing a wide range of examples . Could a Merrill Lynch or E*Trade acquisition reshape the industry?
- Financial services private equity transactions are prominently in the news, with recent acquisitions of both First Data and Sallie Mae prior to the debt market collapse (although numerous transactions are now under threat) . Now some distressed opportunities have arisen for investments in firms like Citigroup, Merrill Lynch, E*Trade, and other firms have sought out multi-billion dollar cash infusions because of questionable investment strategies
- Financial services venture capital also is quite newsworthy with exchange traded fund companies, financial advisor roll-up companies, community banks, and other firms raising substantial capital
Tiburon Strategic Advisors
Tiburon had a very successful year in 2007. The firm’s success revolves around a half-dozen key activities that may present opportunities for many of the firm’s clients:
Tiburon Strategy Consulting, Market Research, & Market Seminar Services
Tiburon has served over 300 corporate clients and completed its 1,000th client project in 2007. Tiburon executives find it amazing that the firm has been engaged by over 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 principals & research managers enjoy the challenges. Challenging projects in 2007 included helping full-service brokerage firms respond to fee-based brokerage account regulations & evolve their core models, assisting independent broker/dealers trying to distinguish their technology platforms, advising retail banks trying to enhance their wealth management services, and brainstorming with 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 mutual fund company CEO in 2007 to assist it in identifying potential acquisition targets.
Tiburon continues to focus on developing broadly documented research as its first priority. As a result, Tiburon executives have been engaged by many firms to deliver presentations and lead brainstorming sessions with boards of directors, senior management teams, venture capital teams, and other groups. Tiburon Market Seminars are a great way to kick-off board meetings, management committee meetings, and sales meetings. Some Tiburon clients then develop their own strategies; others engage Tiburon for further research and strategy work. 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 or research manager in for a one-day market seminar ($15,000 to $25,000 plus travel for its managing principal). 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.
Similarly, the success of Tiburon is now allowing its managing principal to consider joining boards of both private and public companies as well as of mutual fund complexes. The firm finds board roles to be a productive way to contribute to the continual development of its clients' strategies and will consider such opportunities in 2008.
Tiburon CEO Summits
Tiburon held its CEO Summits XII and XIII in San Francisco, CA in April and October of 2007; CEO Summit XIV is planned for April 10-11, 2008 at the Ritz Carlton Hotel in New York, NY. Tiburon's CEO Summits are believed to be a relatively unique cross-industry CEO forum within the financial services industry. At its CEO Summits, Tiburon principals & research managers present Tiburon research and facilitate open discussions about leading-edge industry issues. Along with Tiburon's Managing Principal Chip Roame, guest speakers at CEO Summit XIV in April will include Walt Bettinger (President, The Charles Schwab Corporation), Mike Byrum (President, Rydex Investments, Security Benefit Group), Joe Deitch (CEO, Commonwealth Financial Network), John Hailer (CEO, Natixis Global Advisors North America, Natixis, Banque Populaire Group & Caisse D'Epargne Group), Joe Moglia (CEO, TD Ameritrade, TD Bank Financial Group), John Murphy (CEO, Oppenheimer Funds, Mass Mutual Financial Group), Ron Ryan (CEO, Ryan ALM), & Michael Steinhardt (Chairman, Wisdom Tree Investments). These semi-annual get-togethers are proving to be a real benefit to working more closely with Tiburon clients and the list of business relationships resulting from prior Tiburon CEO Summits is impressive.
Fall 2008 and 2009 dates are October 14-15, 2008 (San Francisco, CA), April 9-10, 2009 (New York, NY), and October 7-8, 2009 (San Francisco, CA). Attendance is by invitation only and attendance at each Tiburon CEO Summit is limited to 100 senior industry executives. Visit the CEO Summits section of Tiburon's web site for details on current and past CEO Summits, including attendee lists, meeting agendas, and highlights.
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Attendees at Tiburon's CEO Summit XIII held October 9-10, 2007 in San Francisco, CA |
Tiburon Conference Speeches & Conference Planner Relations
Tiburon continues to focus on developing broadly documented research as its first priority. As a result, almost all Tiburon clients engage Tiburon principals and research managers for conference speeches ($15,000 plus travel for its managing principal). Tiburon's managing principal now delivers about 80 keynote speeches per year. Common audiences for Tiburon speakers include employee meetings, national & regional trade group meetings, financial advisor annual conferences, financial advisor top producers trips, financial advisor regional forums, and financial advisor due diligence trips. Conference speeches can be scheduled by contacting Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.
Research Report Retainers & Research Reports
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 of its reports comprehensive. The firm published seven new research reports and eleven updated research reports in 2007. These research reports included Consumer Wealth, Liquefaction, & the Retirement Income Challenge, Mutual Funds, Separately Managed Accounts & Other Fee-Account Programs, ETFs & Indexing, Insurance Products, the Retail Banks Market, the Full-Service Brokerage Firms Market, and the Fee-Only Financial Advisors (RIAs) Market. 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 thirty-three existing research reports include:
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Key Driving Reports
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Product Segment
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Financial Advisor Issue Reports
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Strategic Conclusions
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Market Segment
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Summary Report
Building a Business Issues Reports
Tiburon Benchmarking Reports
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Summary Report
Captive Advisor Channels Reports
Independent
International
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Summary Report
Strategic Conclusions Reports
Strategic Thinking Reports
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Summary Report
Key Driving Factors
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Summary Report
Financial Products Reports
Wealth Management Services Reports
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Tiburon's 2008 research reports calendar is subject to change as it is driven by Tiburon's market research & strategy consulting projects, but currently the target reports for early 2008 include:
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Due for January 1, 2008 Publication
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Due for March 1, 2008 Publication
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Due for May 1, 2008 Publication
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Due for July 1, 2008 Publication
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Tiburon is now taking orders for its 2008 Research Report Retainer Service, which helps many of Tiburon's clients to consolidate their research needs & budgets. This is a great opportunity to continuously receive the latest Tiburon research and significantly add to your firm's research library. The Tiburon Research Report Retainer Service offers access to all Tiburon research reports published in a calendar year in addition to the 33 research reports currently published. Tiburon expects to publish about 25 new reports in 2008. All will be proactively delivered and can be widely shared inside a firm, for just $25,000. To subscribe to Tiburon's Research Report Retainer Program, please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.
Tiburon Database Access Program
Over the course of the past ten years and hundreds of industry conferences, speeches & presentations, Tiburon has accumulated contact information on almost 300,000 financial services industry executives, financial advisors, and media representatives. Tiburon’s database includes a wide range of industry participants from client-facing financial advisors through the CEOs of the largest firms. Tiburon shares its database with dozens of clients for $25,000 per year (distributed quarterly). If you are interested in subscribing to the 2008 Tiburon database access program, please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.
Tiburon Benchmarking Tools
One important part of Tiburon’s research agenda is generating proprietary research on the business practices of a variety of types of financial advisors. Tiburon’s thirteen benchmarking tools have now collected practice management data from over 5,000 financial advisors (which is believed to be the largest survey of financial advisors ever). The individual web sites include www.BrokerBestPractice.Com for wirehouse & regional brokers, www.FABestPractices.Com for fee-only financial advisors (RIAs), www.IndependentRepBestPractices.Com for independent reps, and www.PrivateBankerBestPractices.Com for private bankers. Almost 5,000 financial advisors have used these tools. By completing one of the online surveys, financial advisors can access a free copy of the relevant comprehensive Tiburon research report, which summarizes and analyzes the collective results. This data provides Tiburon with a unique advantage in assisting corporate clients in understanding the needs of various types of financial advisors. In 2008, Tiburon plans to make use of the tools available to its clients seeking to survey financial advisors.
Tiburon Research Releases
Tiburon systematized its weekly research releases program in 2007. Over 57,000 industry executives have now signed up at the firm’s web site (www.TiburonAdvisors.Com) to receive these releases. Recent releases have addressed Tiburon's CEO Summits and early January releases will address both new consumer wealth statistics and the booming separately managed accounts & other fee-account programs markets. All past research releases are archived on Tiburon's web site.
Tiburon Consulting Staff & Executive Programs
Tiburon plans to add either a chief consulting officer or two-to-three incremental principals (the most senior role at the firm) and several more research and marketing managers in 2008. Current opportunities exist in three areas:
- Chief Consulting Officer, Principals, & Associate Principals: Tiburon would like to add either a chief consulting officer and/or a team of two-to-three principals and associate principals in 2008. The mid-term objective is for these executives to take over leadership of all Tiburon market research & strategy consulting assignments. The firm is open to receiving proposals.
- Research Managers: Tiburon is seeking to add two more research managers before March 1. Successful candidates are welcome to start early, participate in in-progress research efforts, and join the group with their own report responsibilities on that date.
- Marketing Managers: Tiburon has one specific marketing manager opening, which it hopes to fill by March 1. The available role is to manage the firm's web site, weekly research releases, & semi-annual CEO Summits.
In addition to its consulting staff, Tiburon continued to institutionalize its Executive Programs in 2007, now including almost a dozen strategic alliance partners; program members have access to Tiburon’s research and have participated with it on a variety of assignments. Tiburon’s Consultant Fellows program stems from the recognition that the firm's core capabilities are around market research & strategy consulting but that its clients often need additional help once Tiburon’s research and strategy work is complete. Tiburon’s Financial Advisor Roundtable is intended to involve some financial advisors with strategic views of the industry in the firm’s client work. With the movement towards the financial advisory channels, the opinions and views of these financial advisors are crucial for Tiburon clients. Tiburon expects to add more members to its Executive Programs in 2008; suggestions are welcome. Tiburon also expects to launch its CEOs-in-Residence program later in 2008; this program will be positioned for senior executives from Tiburon clients who are retiring and want to stay involved in the industry in some consulting capacity. Click the links below to read biographies and gather contact information for Tiburon's consulting fellows and financial advisor roundtable members:
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Tiburon Web Site
Tiburon's comprehensive web site provides readers an understanding of Tiburon's growing knowledge base and case studies explaining the ways in which Tiburon utilizes its research for client projects to deliver superior results. Tiburon's web site also contains a historical summary of Prior Tiburon's CEO Summits, summaries of its Research Reports, and links to its Research Releases to help clients stay up-to-date on Tiburon's research, as well as links to its thirteen financial advisor benchmarking tools.
Tiburon Media Relations
Tiburon makes a concerted effort to make its research available to members of the media and schedule interviews with its principals and research managers. Many media reps utilizes Tiburon's research report library as their own reference shelf. Tiburon's research was quoted over 300 times in 2007. Tiburon keeps an updated list of its media coverage on its web site.
Tiburon is also happy to have select media representatives attend its CEO Summits and spread the word about challenging conventional wisdom and maintaining a consumer orientation. If you are interested in attending Tiburon's next CEO Summit (April 10-11, 2008) please read Tiburon's Media Policy and contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.
Conclusions
Taking all that into account, it was a great year for Tiburon. Tiburon’s core business strategy has not changed since the beginning. The firm’s goal is to deliver the highest quality customized market research & strategy consulting services by maintaining a thorough level of knowledge on leading-edge topics in the industry and deploying well-defined management consulting and research processes. In other words, Tiburon expects to possess leading-edge knowledge even before its starts new client projects. As a result, the firm can invest all project time in developing specific understandings of its clients’ situations and assessing their specific business alternatives.
Thank you for the role you played in Tiburon’s 2007 successes. Let us know how else we can help. Happy New Year and best of luck in 2008!
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Chip Roame
Managing Principal
Tiburon Strategic Advisors