Year-End 2007 Recollection: Winning Products & Channels

Mr. Roame introduced his presentation with a brief overview of the recent past, discussing such factors as consumer wealth, the retirement issue, leading & growing products, the state of the channels, and a mention of the increasing role of global markets:

• The ratio of consumer household financial assets had been relatively stagnant since 2002, with investable assets accounting for two-thirds of all financial assets
• Baby boomers were still not saving the traditional way in 2007, maintaining negative saving rates from 2005 & 2006
• Life expectancy was becoming a problem, but consumers, and especially baby boomers, had lots of assets in retirement plans & houses that they could liquidate to retire
• Mutual funds were the dominant investment product and mutual fund net flows still led those of other investment products
• Target date mutual funds had become the industry darling and were gathering assets quickly
• Exchange traded funds had become the most significant product development since mutual funds in the 1940s
• Hedge funds had gathered over $2.0 trillion assets, more than SMAs & ETFs combined
• The wirehouses and retail banks controlled almost two-thirds of all consumer investable assets
• And for investment management firms, non-US mutual funds assets under management had surpassed those of US mutual funds

2008-2009 Credit Crisis: Consumer & Industry Impacts

With the table set, Mr. Roame then discussed the events of the last year, presenting some high-level Tiburon research findings:

And then came the credit crisis, with lots of parties to share the blame, including consumers who took out loans they were unable to handle, commercial banks who created sub-prime & no-documentation processes, mortgage brokers who paid huge agent incentives to close any transaction, & investment banks who created & sponsored complex mortgage backed derivative products
The stock markets all declined sharply in 2008, with the indices being down 31% to 41%
And then came the government's help... All five of the larges US government bailouts have been of financial services companies, wiht four happening in 2008, including the Economic Stabilization Act, and the bailouts of Fannie Mae & Freddie Mac, AIG, and Bear Stearns
The average American worker lost one-quarter of his or her 401k retirement plan savings in 2008
Consumer households lost $2.0 trillion in real estate equity since 2006, down to $8.9 trillion, with home equity levels falling to 43%, which is the lowest number on record
In aggregate, consumer household net worth fell $11.0 trillion in 2008 to $52.0 trillion
And the number of consumer households with over $1.0 million net worth declined almost 30% in 2008 to 6.7 million
There have been several dramatic financial service industry impacts as a result, including huge AUM drops, 325,000 jobs lost worldwide since 2007, $680 billion of losses & write-offs in US firms alone, and investment manganager margins dropping from 40% to 25%
Actively managed equity mutual funds had net outflows of $238 billion in 2008 after years of positive net flows
Hedge fund assets ended 2008 at $1.3 trillion having peaked at $1.8 trillion mid-year
Financial institutions' capital raises have just offset their losses & write downs
Retail banks have had the highest market capitalization loss by percentage in the financial services industry at negative-63%
Bank of America & Merrill Lynch, Citigroup, AIG, Wells Fargo & Wachovia, and JP Morgan Chase, Washington Mutual, & The Bear Stearns Companies all lost over $100 billion of market capitalization since October 2008
As a result of recent events, consumers are skeptical of the financial services industry, with three-quarters believing that Bernie Madoff type behavior is common
Investors are increasingly going to court to seek resolution, filing 210 class action lawsuits alleging securities fraud, up almost 100% since 2006, half of such against financial institutions

Investment products will likely move from complex, risky, & high fees to more simple, risk averse, & sustainable products. Fading products might include closed-end funds, mortgage related products, & securitized products. Those with unclear futures include credit funds, distressed debt funds, & real estate funds. Those products that look like they might emerge as winners include individual equities & bonds, CDs, 40 act structures, and ETFs & Active ETFs
For example, while ETF assets declined from $608 billion to $578 billion in 2008, net flows into ETFs increased to $178 billion, up 20% since 2007
And while 2008 investment returns depressed ten year hedge fund investment returns, those returns are still positive, unlike the long-only world
The most highly ethical and value-added markets & distribution channels are likely to gather the greatest assets. Fading channels might include wirehouses, investment bankers, & investment consultants. Those with inclear futures might include define contribution plans, retail banks, & discount brokers. Those channels that look like they might emerge as winners include online financial services, independent reps, & fee-based financial advisors
On one hand, the major investment banks have gone bankrupt, been acquired, or converted to banks
Goldman Sachs Group's employees have seen their earnings plummet, with an average of $357,000 in 2008, down 50% since 2007
Almost all wirehouse clients say that they intend to take money away from their brokers
Meanwhile, fee-based financial advisors' big three custodians have brought in more new assets since the beginning of 2007 than the big four wirehouses, and The Charles Schwab Corporation's 5,500 fee-based financial advisors have brought in more assets than even Merrill Lynch's 16,690 brokers since the beginning of 2007
Retail banks will be the most aggressive acquirers because they are the largest institutions and financial institutions buyouts are likely to grow significantly from just 13% of all buyouts

Mark Casady (LPL Financial)
Opportunity for independent model has never been greater
Different investors emerging from the economic crisis
Importance of scale
Changing Regulatory Landscape
Kip Condron (Axa Financial)
Disadvantage for federal relief
Public policy to create savings incentives
In-plan guarantees
Life insurers consolidation
Scott Powers (State Street Global Advisors)
Modern portfolio theory questioned
Liability driven investment strategies receiving attention
Hedge funds-of-funds disappointed badly
Demand for absolute return strategies strong
Many considering hiring fewer managers with larger mandates
Pension plans significantly underfunded
Value of investment consultants being questioned
Ken Fisher (Fisher Investments)
Consumer focus
Core focus
Legal risks
Marketing effects
Service formalization
Reconsider employees
Roger Ibbotson (Yale, Zebra, & Ibbotson)
Hedge funds & altenatives golden years ended in 2007
Ten year returns still positive
Economy to fall in 2009
Stock market to see high volatility & high returns from lows
Hedge funds: more withdrawals in 2009
Paul Stevens (Investment Company Institute)
Systemic risk
Regulatory gaps
Capital markets regulation
Desire to increase coverage of 401k plans
Liquidity standards
Portfolio maturity limits
Enhanced credit analysis
Client procedures
Board suspension of redemptions
Jud Bergman (Envestnet)
Broken trust
Broken industry
Broken portfolios
Independents' objectivity
Independents' alignment
Independents' flexibility
Business impacts for product & platform providers
Jeffrey Dunham (Dunham & Associates Investment Counsel)
Performance (fulcrum) fees
Inside mutual funds
Financial advisor fees
Jessica Bibliowicz (National Financial Partners)
Lower employment, compensation, & contributions
Potential health care reform
Early recovery typical of insurance
Federal regulation of insurance
Intra wirehouse movement
Winning business from the wirehouses
Conserving cash
Helping firms

Modern Portfolio Theory
Break Away Brokers
Financial Advisor Technology
Retirement Income & the Impace of the Recent Credit Crisis
Alternative Investments
Distribution Insight that Works