See Table of Contents for Tiburon's Fee-Based Financial Advisors Research Report Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to announce the release of its new research report on Fee-Based Financial Advisors (RIAs). This research release summarizes some of the report's key findings. The purpose of this report is to provide readers with an initial understanding of the fee-based financial advisors (RIAs) market, the fastest growing financial services market & distribution channel. The report goes to painstaking efforts to define this market, which is often improperly defined and measured by others. A parallel report published by Tiburon, called A Comprehensive Overview of the Product Usage, Business Models, & Best Practices of Fee-Based Financial Advisors, provides extensive bottom up analysis of the specific actions of fee-based financial advisors. This report provides a top down view of the market. This is the second draft of Tiburon's research on this topic. Tiburon’s first draft of this report was published in 2007; that draft consolidated prior Tiburon research into one report. This is Tiburon’s second draft of this report; this draft fleshes out the market history chapter, develops a framework for properly measuring the fee-based financial advisor industry, incorporates some recent Tiburon research on fee-based financial advisors’ use of technology, and reconciles Tiburon’s findings with a third-party research report. This draft also enhances the profiles of the three leading fee-based financial advisor custodians - The Charles Schwab Corporation, Fidelity Investments, & TD Ameritrade - as well as several smaller custodians, including Shareholder Services Group & Trust Company of America. Key Findings This report has a long list of interesting facts to share: Market History The fee-based financial advisors industry emerged in the 1980s and early 1990s, and has subsequently evolved through its expansion, and now its maturation phases The Merrill Lynch Rule was established in 1999 upon the introduction of its Unlimited Advantage fee-based brokerage account to allow brokers that previously relied solely on commissions to accept fee business without registering as investment advisers The Financial Planning Association challenged the Merrill Lynch Rule for the first time in 2004 through a lawsuit The Financial Planners Association lawsuit was instigated after taking a survey of its members in 2004, where nearly all members preferred a lawsuit against the Securities & Exchange Commission as opposed to a compromise The Securities & Exchange Commission unanimously approved the Merrill Lynch Rule in 2005, clearing the way for broker/dealers to offer fee-based accounts without registering as investment advisers The Financial Planners Association filed a second lawsuit against the Securities & Exchange Commission in 2005, challenging its 2005 decision to modify and make permanent the broker/dealer exemption The broker/dealer exemption, dubbed the Merrill Lynch Rule, was abolished in 2007 causing reps offering fee-accounts to convert them to other compensation arrangements or register as investment advisors Market Definition The fee-based financial advisors market is much broader than that held by the traditional custodians Fee-based financial advisors primarily provide portfolio management & financial planning services To accurately count fee-based financial advisors one must add up Securities & Exchange Commission and state registered investment advisors, and subtract segments like mutual fund companies; one may or may not want to add back segments like family offices The number of fee-based financial advisors ranges from 7,518 to 18,159 depending on which segments are included, with 18,159 possibly being the most useful estimate Fee-based financial advisors serve between 2.6 million and 6.9 million clients depending on which segments are included, with 6.9 possibly being the most useful estimate One reason the fee-based financial advisor market is difficult to measure is because of the overlap with independent broker/dealers The average fee-based financial advisor is 45 years old; larger advisors are older Amongst fee-based financial advisors it isn’t surprising to learn that an RIA is the most popular designation; it is a more surprising to find the great number of series 7 license holders Market Growth There are 18,159 fee-based financial advisors, up nearly 40% since 2005 Fee-based financial advisors have $2.0 trillion assets under management, up nearly 40% since 2005 Fee-based financial advisor’s top three custodians have brought in more net new assets since the beginning of 2007 than the top four wirehouses Leading Fee-Based Financial Advisors The Charles Schwab Corporation is the largest custodian for fee-based financial advisors The Charles Schwab Corporation touches over three-quarters of all fee-based financial advisors Depending on what is counted, some of the other new custodians like Bear Stearns and Merrill Lynch have some substantial assets Market Segmentation There are 10,900 Securities & Exchange Commission registered investment advisors, up nearly 40% since 2005 There are 641 mutual fund companies, an increase of 41 since 2005 Mutual funds’ consumer household penetration is 44%, down 12% from the 50% penetration in 2002 There are 9,800 hedge funds, up over 100% since 2000 US hedge funds assets under management have grown significantly to almost $2 trillion, up nearly 500% since 2000 but flat since 2006 Since 1996, packaged fee-accounts asset growth has been explosive, reaching $1.5 trillion at the end of 2006 There are 10,000 dually registered independent broker/dealers, up nearly 40% since 2005 There are 41 TAMPs, flat since 2006 The growth in TAMP assets has been rapid, with TAMPs now accounting for $255 billion; the addition of prudential financial’s assets into the TAMP category is one factor Key Vendors To Fee-Based Financial Advisors Smaller firms are more likely to outsource services while larger firms generally do not outsource their access to securities, separate account management, or asset allocation Many firms engage in some kind of strategic alliance. Most firms engage in back-office support services, accounting for 15% Custodians, Independent Broker/Dealers, & Clearing Brokers Fee-based financial advisors at The Charles Schwab Corporation and Fidelity Investments say that their primary decision criteria was service while TD Ameritrade fee-based financial advisors more often said cost Almost all fee-based financial advisors have a dedicated individual or team providing them service at their custodian Nearly all fee-based financial advisors custody over half of their client assets at their primary custodian Mutual Fund Companies & Other Traditional Product Companies Over three-quarters of registered investment advisors clear trades & custody assets with one or more of the major clearing agents The Charles Schwab Corporation dominates the fee-based financial advisors custody business, with about one-half of all advisors Break-away brokers account for an extremely small portion of the total broker population of 68,000 Almost all of fee-based financial advisors’ assets under management are invested in mutual funds, equities, & bonds Amongst disclosed advisors currently utilizing the Japan Fund, they most frequently listed performance as the critical decision factor for choosing funds Interestingly, amongst disclosed advisors currently utilizing the Japan fund, over half admit that mutual fund company marketing does have at least a moderate impact Fee-Accounts, TAMPs, Separately Managed Accounts, & Outsourcing Trends Wrap accounts are most utilized by the larger firms with more than $200 million assets under management Fee-based financial advisors with $200 million assets under management and above largely utilize separately managed accounts Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies Fee-based financial advisors’ opinions differed widely on the importance of the emergence of exchange traded funds, rating it at 5.0 on average Wealth Management & Family Office Service Product Companies Fee-based financial advisors interviewed rated the importance of offering wealth management services to clients at an average score of 7.3 One fee-based financial advisor said his firm increased CD business from $6 million per month to $12 million per month by offering Everbank CDs Technology Companies & Other Key Vendors to Fee-Based Financial Advisors Independent reps most often mention using tools provided by their financial planning software and broker/dealer for their sales enabling technology Morningstar is the leading asset allocation software product used by independent reps Data download software users are dominated by The Charles Schwab Corporation, with about half of all fee-only financial advisors using its software Fee-based financial advisors are willing to pay an average of over $110,000 per year for a superior ASP model, with a median of $100,000 Future Predictions for The Fee-Based Financial Advisors Market The fee-based financial advisors market will likely see many developments, including a slowing in the growth of the number of fee-based financial advisors, but rapid growth in their assets under management Break-Away Brokers & Rapid Growth in Industry Assets Under Management This section outlines break-away brokers & rapid growth in industry assets under management. The number of fee-based financial advisors will grow from just over 16,000 to over 19,000 by 2012 Over three-quarters of fee-based financial advisors expect to growth their client assets 10% or greater per annum over the coming three-to-five years Larger fee-based financial advisors expect to defy the law of large numbers by growing at a faster rate than small fee-based financial advisors There will be slowing growth in the number of fee-based financial advisors but rapid growth in their assets under management Continuing Central Role of Custodians & Difficulty in Penetrating Custody Market The number of fee-based financial advisor custodians will decrease as the number of consolidations will be larger than the number of new custodians entering the market The three largest fee-based financial advisor custodians serve over 67% of end clients Continuing Use of Mutual Funds & Individual Securities and Growing Use of Exchange Traded Funds, Alternative Investments, & Wealth Management Products Mutual funds and individual stocks, & bonds account for nearly all of registered investment advisor assets under management. All other products account for 14% registered investment advisors assets under management Long-Awaited Consolidation in the Industry & the Potential of Producer Groups Finally there will be some consolidation in the fee-based financial advisors industry Fee-based financial advisor mergers & acquisitions are up over 600% since 1999, with 81 deals taking place in 2007 Fee-based financial advisor mergers & acquisitions will increase to 163 per year by 2012 To better understand the developments for Fee-Based Financial Advisors, executives can purchase Tiburon's An Initial Overview of the Fee-Based Financial Advisors (RIAs) Market research report where the key findings highlighted above are covered in greater detail. Please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.