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Context Setting

Holiday greetings from Tiburon!!! 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 historic & transformative developments. The beginning of the baby boomers' retirement was to unlock enormous wealth and present unprecedented asset gathering opportunities over the coming decade, but the fallout from investors' over-leveraging in subprime mortgages has changed the short-term landscape. Investment account values have crumbled along with housing prices. Risk management, regulation, & transparency have become the hallmarks of the foreseeable future, and as the fallout is sure to continue, some firms will proactively plan for change, and thereby flourish, while other firms will be reactionary, and possibly find themselves among the many casualties of this re-structuring of industry power. Furthermore, firms that take this downturn as an opportunity to re-consider their business models, that return to fiduciary responsibility, and that move quickly to rebuild their brands by restoring consumer confidence, will soar. Tiburon remains convinced of the enormous potential for the brokerage, investments, wealth management, & advice industries, but thinks that, almost across the board, an increased consumer orientation and additional research may lead to better strategies.

Against this backdrop, Tiburon had another terrific year in 2008, executing its core business strategy centered on its market research & strategy consulting services, with its revenues up 20%. The firm completed its 1,100th client project, delivered dozens of market seminars & conference speeches, held Tiburon CEO Summits XIV and XV, refined its research report & database access programs, exceeded 5,000 users in its financial advisor benchmarking tools, released 14 new and dozens of updated research reports, hired four new research managers, and expanded its consulting fellows program.

The News: The Credit Crisis & the Historic Presidential Election

At Tiburon CEO Summit XV, in a departure from past Tiburon CEO Summit Opening Keynote Presentations, I skipped providing a broad synopsis of the last six months to instead address the specific topic on everyone's mind: the credit crisis & the historic presidential election:

  • The root causes of the credit crisis included artificially low interest rates and the rapid growth in subprime mortgages, with outstanding subprime loans more than doubling from $600 billion in 2006 to $1.3 trillion in 2007
  • An amazing 41% of subprime mortgages were granted without full documentation, up from 22% in 1999 (most of which misstated income)
  • Subprime & other non-prime mortgages account for over 90% of all resetting mortgages in 2007 & 2008
  • Hence, it is pretty easy to conclude that the intersection of adjustable rates and subprime mortgages was a disaster waiting to happen
  • Over one-quarter of subprime adjustable rate mortgages are now 90 days or more past due, up from 5% to 10% in 2002 to 2006
  • The GSEs became the big buyers of mortgages over recent years, purchasing almost two-thirds of mortgage originations, up from a low of 33% in 2006
  • Meanwhile, the commercial & investment banks transformed themselves into packagers of products, with collateralized debt obligations issuances increasing rapidly to $310 billion, up 100% since 2005
  • Hence, subprime write-offs have been staggering, led by those at UBS, Merrill Lynch, & Citigroup, with $37.1, $25.1, & $23.9 billion respectively
  • Various observers blame consumers (misstated income), commercial banks (knowingly made bad loans), investment banks (over-leveraged), & the US government (did nothing) for the credit crisis
  • The bailout strategy was established in March 2008 when Bear Stearns went under and Ben Bernanke was quoted as saying that the Federal Reserve action was, "necessary to sustain the viability of the American financial system"
  • A few months later, Lehman Brothers lost 80% of its value, falling from $28 billion to just $6 billion and causing big hits for Alliance Bernstein ($476 million) & other large shareholders
  • The failure of Washington Mutual was the largest bank collapse in United States history and Texas Pacific Group took a huge loss on its $2.0 billion investment made in April
  • Wachovia Corporation's value sank to an amazing low, even less than the $25 billion it had paid for Golden West Financial
  • The five largest United States government bailouts have all been of financial services companies, including four this past year
  • There has been significant skepticism regarding giving more power to the government, with one past Tiburon CEO Summit speaker saying that, "when you look at the quality of the people attracted to the Federal Reserve, I do not want them to have any more power"
  • The stock market has declined sharply in 2008, with most indices being down 30% to 40%
  • While some hedge funds have outperformed global markets in 2008, many large hedge funds have gotten clobbered, the Madoff scandal is shocking, and assets are likely to flow out quickly
  • There have been 760,000 jobs lost in 2008, the biggest loss since 2001
  • The bigger picture public policy issue here is the threat to baby boomers' ability to retire as the losses in investment accounts and real estate equity will challenge the liquidation
  • There were a few winners, including Bank of America Corporation, JP Morgan Chase, & Wells Fargo Corporation, as well as all of us who rely so much on foreign oil
  • And for perspective ... in keeping with the honest & balanced perspective adhered to at Tiburon CEO Summits, I had to remind attendees that some had it even worse than any of us (just think about the years had by Eliot Spitzer & OJ)

A Step Back: A Reminder About Fundamental Industry Trends

As is tradition at the Tiburon CEO Summits, I then brought attention away from the immediate news and back to the long-term fundamental industry trends, presenting some high-level Tiburon research findings:

Fundamental Trends

  • US households control almost three-quarters of all investable assets, two-thirds of that invested via financial advisors
  • More than half of consumer households have less than $100,000 of investable assets, with 28% having less than $10,000
  • Baby boomers are not saving the traditional way, with negative savings starting in 2005 and continuing in 2006 & 2007
  • Only 2% of baby boomers will receive an inheritance of more than $100,000
  • Even more critical is the fact that more than half of 65 year old males will reach age 85 and over one-third will reach 90
  • Take a moment to realize that the commonly held life expectancy of 77 years is therefore meaningless, as it fails to take into account the fact that those who reach retirement age will out-live the projected retirement period and go broke
  • Baby boomers' pending retirement will drive more assets into the investable assets market

Products & Services

  • There is always media noise surrounding the so-called next big thing, whatever that may be (I receive daily calls from journalists asking me when ETFs will surpass mutual funds in assets under management), but mutual funds are still the dominant investment product with $12 trillion assets under management
  • Perspective must be maintained when everybody is focusing on percentages; most Tiburon clients generally seek to "gather dollars, not percentage points"
  • Mutual fund net flows still lead those of other investment products with $243 billion in 2007, more than hedge funds & ETFs with $195 billion & $151 billion, respectively
  • Packaged fee-account assets have grown substanially over the past eight years to over $1.5 trillion
  • The movement in the wirehouses is to unified managed accounts & broker wrap accounts
  • More broadly, the investment process is being polarized with twin growth patterns in both market-linked products & alternative investments
  • Exchange traded funds are the most significant product development since mutual funds in the 1940s, showing growth in excess of 30% year-to-year between 2002 & 2007, when assets reached $608 billion
  • US hedge funds assets under management have also grown significantly to almost $2.0 trillion (although they are threatened by recent developments)
  • Of course, if none of these invesments seems appealing, one could always start a winery like everyone else; as of 2007, there are almost 6,000 US wineries, almost three times as many as in 2000
  • 14% or 40 million Americans lack health care insurance
  • Annuities seem to be misused, with 79% of annuities sales in 2006 really being existing policy transfers (1035 exchanges)

Markets & Distribution Channels

  • On the channel side captive brokers & retail banks have historically dominated control of consumer investable assets
  • But independent advisors collectively continue to outgrow the competition, growing at 18% annually between 1995 & 2007
  • It behooves me to mention the many "experts" who are predicting the mass flood to independence; as of today it is still not happening: only 2% of financial advisors are actually breaking away in any given year, while most moving brokers are simply riding a carousel that revolves within the wirehouses

Strategic Conclusions

  • Strategically, the independent broker/dealers have been in their second round of consolidation, with LPL Financial Services, Advanced Equities Financial Corporation, Ameriprise Financial, and Ladenburg & Thalmann having already made numerous acquisitions
  • Retail banks are displaying that they constitute nearly two-thirds of the financial services sector's market capitalization and hence will be the most frequent buyers
  • Although capital has gone scarce in private equity, financial services companies present a big opportunity and there may be many forced sellers
  • Organically, the biggest growth is in the fee-based financial advisors, with Schwab Institutional likely reaching $1.0 trillion assets under administration in three years
  • Surprising to many, the discount brokers are also doing well, rapidly shifting to models of generating their revenues from advice
  • For product companies, it is worth noting that non-US mutual funds assets under management have surpassed those of US mutual funds, crossing the 50% threshhold in 2006 and continuing to increase market share

Semi-Annual Tiburon Broad (& Sometimes Risky) Predictions

After concluding my opening remarks on the state of the industry at the recent Tiburon CEO Summit, I offered some ideas on what might be in store for the next six months:

  • Obama will win in November
  • Stimulation plans will accelerate in early 2009 with the Democrats controlling all of Washington (and the media)
  • Earnings season will be ugly in early 2009; subprime write-offs will double in size
  • ETFs will battle mutual funds for the lead in flows in 2009, leaving separately managed accounts behind
  • More brokers will head for the exits (more lift-outs coming) but still look for no more than a 2% to 4% attrition rate
  • LPL will acquire the AIG broker/dealers, creating the first 20,000 financial advisor force (and then will go public)
  • Morgan Stanley will sell out to a bank and/or spin-off its reps
  • UBS will spin-off its investment bank and refocus on its private banking franchise

Tiburon Strategic Advisors

Tiburon had a very successful year in 2008. 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 it completed its 1,100th client project in 2008. 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 2008 included advising retail banks trying to enhance their wealth management services, helping full-service brokerage firms respond to the credit crisis and restructure ownership, and assisting independent broker/dealers trying to clarify the break-away broker trend. Furthermore, Tiburon’s wide client network can be useful in many regards. For instance, Tiburon was engaged by one mutual fund company CEO in 2008 to assist it in identifying potential acquisition targets.

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 or research manager in for a one-day market seminar ($15,000 to $25,000 plus travel for its managing principal). 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. 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 now allows 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 2009.

Tiburon CEO Summits

Tiburon held its CEO Summits XIV and XV in New York, NY in April and San Francisco, CA in October of 2008, respectively. Tiburon CEO Summit XVI is planned for April 15-16, 2009 at the Ritz Carlton Hotel in New York, NY. Tiburon's CEO Summits provide a unique opportunity for a select cross-industry group of senior executives to discuss a broad swath of issues regarding the future of the brokerage, investments, advice, & wealth management businesses. Along with Tiburon's Managing Principal Chip Roame, guest speakers at Tiburon CEO Summit XVI this spring will include Jud Bergman (CEO, Envestnet Asset Management), Jessica Bibliowicz (CEO, National Financial Partners), Mark Casady (CEO, LPL Financial Services), Kip Condron (CEO, Axa Financial), Jeffrey Dunham (CEO, Dunham & Associates Investment Counsel), Ken Fisher (CEO, Fisher Investments), Roger Ibbotson (Professor, Yale University; Chairman, Zebra Capital Management; & Former CEO, Ibbotson Associates), Scott Powers (CEO, State Street Global Advisors), & Paul Stevens (CEO, Investment Company Institute). These semi-annual get-togethers are proving to be a real benefit to Tiburon clients working more closely with one another; the list of business relationships resulting from prior Tiburon CEO Summits is impressive.

Fall 2009 and 2010 dates for Tiburon CEO Summits are October 8-9, 2009 (San Francisco, CA), April 14-15, 2010 (New York, NY), and October 13-14, 2010 (San Francisco, CA). Attendance at each Tiburon CEO Summit is managed to between 100 and 125 executives and is reserved for Tiburon's executive-level clients. Visit the Tiburon CEO Summits section of Tiburon's web site for details on its current and past CEO Summits, including attendee lists, meeting agendas, & highlights.

Tiburon's CEO Summit XIV attendees held April 10-11, 2008 in New York, NY

Tiburon Conference Speeches & Conference Planner Relations

Because Tiburon continues to focus on developing broadly documented research as its first priority, 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 alone now delivers about 80 keynote speeches per year. Common audiences for Tiburon speakers include senior management team offsites, 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.

Tiburon Research Report Access Program & Research Reports

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 aims to continually publish research on leading-edge industry topics and to attempt (over time) to make each of its reports comprehensive. The firm published 14 new research reports and updated dozens of existing research reports in 2008. These research reports included Mutual Funds, Separately Managed Accounts & Other Fee-Account Programs, ETFs & Indexing, Estate Planning & Charitable Giving, Online Tools & Advice, Online Brokerage, Independent Reps & Independent Broker/Dealers, Fee-Based Financial Advisors (RIAs), Upscale Channels, English Speaking Countries Markets, Financial Advisor Mergers & Acquisitions, and Financial Advisor Profiles. Tiburon's Research Report Access Program provides access to all Tiburon reports for all employees of any firm for $25,000 per year. Tiburon's 48 existing research reports include (with tables of contents available to view by clicking on the links below):

The Future of Advice: Defining the Winning Products, Channels, & Tactical Strategies

Key Driving Factors Reports
Product & Service Reports
Strategic Conclusions
Reports
Market & Distribution Channel Reports
Tactics Reports

Summary Report

Strategic
Conclusions Reports

Strategic
Thinking Reports

Summary Report

Wealth Reports

Current Events Reports

    Summary Report

    Financial Products Reports

    Wealth Management Services Reports

    Financial Advisor
    Channels Reports

    International Markets Reports

    Summary Report

    Financial Services Institutions Tactics Reports

    (Coming Soon)

    Financial Advisor Tactics Reports

    Financial Advisor Benchmarking & Best Practices Reports
    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.BrokerBestPractices.Com for wirehouse & regional brokers, www.FABestPractices.Com for fee-based financial advisors (RIAs), www.IndependentRepBestPractices.Com for independent reps, and www.PrivateBankerBestPractices.Com for private bankers. Over 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 2009, Tiburon plans to make use of the tools available to its clients seeking to survey financial advisors.

    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 over 325,000 financial services industry executives, financial advisors, conference planners, & 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 2009 Tiburon Database Access Program, please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.

    Tiburon Research Releases

    Tiburon revised and expanded its weekly research releases program in 2008. Over 125,000 industry executives have now signed up at the firm’s web site (www.TiburonAdvisors.Com) to receive these releases. Recent releases have addressed Tiburon CEO Summit XV and recent research reports on the booming separately managed accounts & other fee-account programs markets and estate planning & charitable giving. Early January releases will address new research reports on independent reps & independent broker/dealers and fee-based financial advisors (RIAs), as well as the upcoming Tiburon CEO Summit XVI. 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 managers & research associates in 2009. Current opportunities exist in two areas:

    • Chief Consulting Officer, Principals, & Associate Principals: Tiburon would like to add either a chief consulting officer and/or a team of three principals and associate principals in 2009. The mid-term objective is for these executives to take over leadership of all Tiburon market research & strategy consulting assignments. Opportunities exist to lead the firm's venture consulting, M&A, Tiburon Tools, and other businesses. The firm is open to receiving proposals
    • Research Managers & Research Associates: Tiburon is seeking to add research associates beginning in 2009. Successful candidates will report to existing Tiburon Research Managers and participate actively in publishing research reports

    In addition to its consulting staff, Tiburon continued to expand its Executive Programs in 2008, now including almost 20 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 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 2009. Tiburon also expects to launch its CEOs-in-Residence program later in 2009; 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:

    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 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 almost 200 times in 2008. 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 15-16, 2009) in New York, NY 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 its founding in 1998. 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 it 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 2008 successes. Let us know how else we can help. Happy New Year and best of luck in 2009!

    Chip's Signature

    Chip Roame
    Managing Principal
    Tiburon Strategic Advisors