Competition & Advice: Predicting the Winning Markets & Distribution Channels

Financial Institutions Research Report Series & Financial Advisors Research Report Series Competition & Advice: Predicting the Winning Markets & Dist...
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Financial Institutions Research Report Series & Financial Advisors Research Report Series

Competition & Advice: Predicting the Winning Markets & Distribution Channels

March 2009

TABLE OF CONTENTS INTRODUCTION, KEY FINDINGS, & EXECUTIVE SUMMARY....................................10 MAKING SENSE OF THE IMPACTS OF TODAY’S MARKET EVENTS .......................42 Significant Consumer Impacts & Accelerating Product Shifts .....................................42 New Regulatory Regime ............................................................................................65 Accelerating Channel Shifts .......................................................................................70 A Return to Tactical Basics ........................................................................................82 Abundant Financial Services Industry Investment Opportunities ................................85 STATE OF THE MARKETS & DISTRIBUTION CHANNELS .........................................94 Online Tools & Advice................................................................................................94 Evolution of Online Tools & Advice .........................................................................94 Market History .....................................................................................................94 Market Definition..................................................................................................95 Market Growth .....................................................................................................95 Leading Online Tools & Advice Companies .........................................................96 Market Segmentation..............................................................................................96 Evolution of Sales Enabling Technology..............................................................96 Financial Planning Software ................................................................................97 Asset Allocation Software ....................................................................................99 Trade Order Management Systems...................................................................101 Data & Research Services.................................................................................101 Data Download Software ...................................................................................102 Portfolio Management Software.........................................................................102 Account Aggregation .........................................................................................104 Contact Management Software .........................................................................105 Advisor Workstations .........................................................................................105 Key Vendors to Online Tools & Advice .................................................................107 Online Brokerage .....................................................................................................107 Evolution of the Online Brokerage Industry ...........................................................107 Market History ...................................................................................................107 Market Definition................................................................................................110 Market Growth ...................................................................................................110 Key Issues.........................................................................................................110 Leading Online Brokerage Companies ..............................................................114 Market Segmentation............................................................................................116 Discount Brokerage Firms .................................................................................116 Online Only Brokerage Firms.............................................................................116 Direct Access Brokerage Firms .........................................................................116 Key Vendors to Online Brokerage Companies......................................................116 News, Quotes, & Media Vendors .......................................................................116 Custodians & Clearing Brokers..........................................................................116 Mutual Fund Companies & Other Traditional Product Companies .....................116 Fee-Accounts, TAMPs, & Separate Account Managers.....................................116 Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies ..........................................................................................................................116 Wealth Management & Family Office Service Product Companies ....................116 Technology Companies Infrastructure Vendors .................................................116 Online Banking & Mortgages....................................................................................116 2 09.03.01 – Markets & Distribution Channels

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Evolution of the Online Banking & Mortgage Industries.........................................116 Market History ...................................................................................................116 Market Definition................................................................................................118 Market Growth ...................................................................................................118 Demographics.............................................................................................118 Uses of Online Banking & Concerns ...........................................................118 Online Bill Pay.............................................................................................119 Leading Online Banking & Mortgage Companies...............................................119 Market Segmentation............................................................................................120 Key Vendors to Online Banking & Mortgage Companies ......................................121 News, Quotes, & Media Vendors .......................................................................121 Technology Infrastructure Vendors ....................................................................121 Online Insurance......................................................................................................121 Evolution of the Online Insurance Industry............................................................121 Market History ...................................................................................................121 Market Definition................................................................................................123 Market Growth ...................................................................................................123 Leading Online Insurance Companies ...............................................................123 Market Segmentation............................................................................................123 Key Vendors to Online Insurance Companies.......................................................123 News, Quotes, & Media Vendors .......................................................................123 Technology Companies & Other Key Vendors...................................................123 Retail Banks.............................................................................................................123 Evolution of Retail Banks ......................................................................................123 Market History ...................................................................................................123 Market Definition................................................................................................125 Market Growth ...................................................................................................125 Key Issues.........................................................................................................125 Leading Retail Banks.........................................................................................129 Market Segmentation............................................................................................130 Key Vendors to Retail Banks ................................................................................131 Custodians, Clearing Brokers, & Independent Broker/Dealers...........................131 Mutual Fund Companies & Other Traditional Product Companies .....................131 Fee-Accounts, TAMPs, & Separate Account Managers.....................................132 Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies ..........................................................................................................................133 Wealth Management & Family Office Service Product Companies ....................133 Technology Companies & Other Key Vendors...................................................133 Full-Service Brokerage Firms...................................................................................133 Evolution of Full-Service Brokerage Firms ............................................................133 Market History ...................................................................................................133 Market Definition................................................................................................134 Market Growth ...................................................................................................135 Leading Firms....................................................................................................136 Market Segmentation............................................................................................139 Wirehouse Firms ...............................................................................................139 Reginal Brokerage Firms ...................................................................................139 Key Vendors to Full-Service Brokers ....................................................................139 Independent Reps....................................................................................................139 Evolution of the Independent Reps Business........................................................139 Market History ...................................................................................................139 3 09.03.01 – Markets & Distribution Channels

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Market Definition................................................................................................141 Market Growth ...................................................................................................141 Key Issues.........................................................................................................141 Leading Independent Broker/Dealers ................................................................145 Market Segmentation............................................................................................146 Key Vendors to Independent Reps .......................................................................147 Independent Broker/Dealers, Custodians, & Clearing Brokers...........................147 Independent Broker/Dealers........................................................................147 Custodians ..................................................................................................149 Clearing Brokers .........................................................................................149 Mutual Fund Companies & Other Traditional Product Companies .....................150 Mutual Fund Companies .............................................................................150 Other Traditional Product Companies .........................................................150 Fee-Accounts, TAMPs, & Separate Account Managers.....................................150 Fee-Accounts..............................................................................................150 Turnkey Asset Management Programs (TAMPs) ........................................150 Separate Account Managers .......................................................................150 Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies ..........................................................................................................................150 Exchange Traded Funds .............................................................................151 Hedge Funds ..............................................................................................151 Other Investment Product Companies.........................................................151 Wealth Management & Family Office Service Product Companies ....................151 Wealth Management Service Product Companies ......................................151 Family Office Service Product Companies ..................................................151 Technology Companies & Other Key Vendors to Independent Reps .................151 Technology Companies...............................................................................151 Other Key Vendors to Independent Reps ....................................................152 Fee-Based Financial Advisors..................................................................................152 Evolution Of The Fee-Based Financial Advisors Business....................................153 Market History ...................................................................................................153 Market Definition................................................................................................154 Market Growth ...................................................................................................156 Leading Fee-Based Financial Advisors..............................................................156 Market Segmentation............................................................................................157 Key Vendors To Fee-Based Financial Advisors ....................................................158 Custodians, Independent Broker/Dealers, & Clearing Brokers...........................159 Mutual Fund Companies & Other Traditional Product Companies .....................161 Fee-Accounts, TAMPs, Separately Managed Accounts, & Outsourcing Trends.162 Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies ..........................................................................................................................162 Wealth Management & Family Office Service Product Companies ....................163 Technology Companies & Other Key Vendors to Fee-Based Financial Advisors ..........................................................................................................................163 Insurance Agents .....................................................................................................166 Evolution of the Insurance Agencies, Brokers, & Producer Groups Business .......166 Market History ...................................................................................................166 Market Definition................................................................................................166 Market Growth ...................................................................................................166 Key Issues.........................................................................................................166 4 09.03.01 – Markets & Distribution Channels

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Leading Captive & Independent Insurance Agencies, Brokers, & Producer Groups ..........................................................................................................................168 Market Segmentation............................................................................................168 Key Vendors to the Insurance Agencies, Brokers, & Producer Groups Business..170 Independent Broker/Dealers, Custodians, & Clearing Brokers...........................170 Mutual Fund Companies & Other Traditional Product Companies .....................171 Fee-Accounts, TAMPs, & Separate Account Managers.....................................171 Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies ..........................................................................................................................171 Wealth Management & Family Office Service Product Companies ....................171 Technology Companies & Other Key Vendors...................................................171 CPA Firms ...............................................................................................................171 Evolution of the CPA Firms Business....................................................................171 Market History ...................................................................................................171 Market Definition................................................................................................171 Market Growth ...................................................................................................171 Leading Firms....................................................................................................172 Market Segmentation............................................................................................173 Key Vendors to CPA Firms ...................................................................................186 Estate Attorneys.......................................................................................................186 Evolution of Estate Attorneys ................................................................................186 Market History ...................................................................................................186 Market Definition................................................................................................186 Market Growth ...................................................................................................186 Leading Firms....................................................................................................186 Market Segmentation............................................................................................186 Key Vendors .........................................................................................................187 Real Estate Agents ..................................................................................................187 Evolution of Real Estate Agents............................................................................187 Market History ...................................................................................................187 Market Definition................................................................................................187 Market Growth ...................................................................................................187 Leading Firms....................................................................................................187 Market Segmentation............................................................................................187 Key Vendors .........................................................................................................187 Mortgage Brokers ....................................................................................................187 Evolution of Mortgage Brokers..............................................................................187 Market History ...................................................................................................187 Market Definition................................................................................................187 Market Growth ...................................................................................................187 Leading Firms....................................................................................................187 Market Segmentation............................................................................................187 Key Vendors .........................................................................................................187 Upscale Channels....................................................................................................188 Evolution of the Upscale Channels Industry..........................................................188 Market History ...................................................................................................188 Market Definition................................................................................................189 Market Growth ...................................................................................................189 Leading Firms....................................................................................................189 Market Segmentation............................................................................................190 Private Banks..............................................................................................190 5 09.03.01 – Markets & Distribution Channels

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Investment Banks & Boutique Brokerage Firms ..........................................191 Processing Banks .......................................................................................192 Separate Account Managers .......................................................................192 Investment Consultants...............................................................................193 Sports Agents & Business Managers ..........................................................193 Family Offices .............................................................................................193 Key Vendors to Upscale Channels........................................................................194 Custodians, Independent Broker/Dealers, & Clearing Brokers...........................194 Mutual Fund Companies & Other Traditional Product Companies .....................194 Fee-Accounts, TAMPs, & Separate Account Managers.....................................194 Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies ..........................................................................................................................194 Wealth Management & Family Office Service Product Companies ....................195 Technology Companies & Other Key Vendors...................................................195 Institutional Channels...............................................................................................195 Evolution of Institutional Channels ........................................................................195 Market History ...................................................................................................195 Market Definition................................................................................................195 Market Growth ...................................................................................................195 Leading Firms....................................................................................................195 Market Segmentation............................................................................................195 Key Vendors .........................................................................................................195 English Speaking Countries Markets........................................................................195 Evolution of the English Speaking Countries Markets ...........................................195 Market History ...................................................................................................195 Market Definition................................................................................................195 Market Growth ...................................................................................................196 Key Issues.........................................................................................................196 Leading Firms....................................................................................................202 Market Segmentation............................................................................................202 Key Vendors to the English Speaking Countries Markets .....................................205 Custodians, Clearing Brokers, & Independent Broker/Dealers...........................205 Mutual Fund Companies & Other Traditional Product Companies .....................205 Fee Accounts, TAMPs, & Separate Account Managers .....................................205 Exchange Traded Funds, Hedge Funds, & Other Investment Product Companies ..........................................................................................................................205 Wealth Management & Family Office Service Product Companies ....................205 Technology Companies & Other Key Vendors...................................................205 Europe, Middle East, & Africa Markets.....................................................................205 Evolution of Europe, Middle East, & Africa Markets ..............................................205 Market History ...................................................................................................205 Market Definition................................................................................................207 Market Growth ...................................................................................................207 Leading Firms....................................................................................................207 Market Segmentation............................................................................................207 Germany............................................................................................................207 France ...............................................................................................................208 Italy....................................................................................................................209 Other European Countries .................................................................................210 Middle Eastern Countries ..................................................................................210 6 09.03.01 – Markets & Distribution Channels

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African Countries ...............................................................................................211 Leading European, Middle East, & African Countries Markets Financial Services Companies ........................................................................................................211 Key Vendors .........................................................................................................211 Asia Pacific Markets.................................................................................................211 Evolution of the Asia Pacific Markets ....................................................................211 Market History ...................................................................................................211 Market Definition................................................................................................211 Market Growth ...................................................................................................211 Leading Countries .............................................................................................212 Market Segmentation............................................................................................212 Japan ................................................................................................................212 China & Hong Kong ...........................................................................................212 Korea.................................................................................................................212 India ..................................................................................................................212 Taiwan...............................................................................................................213 Malaysia & Singapore........................................................................................213 Other Asia Pacific Countries ..............................................................................213 Key Vendors .........................................................................................................213 Latin America Markets .............................................................................................213 Evolution of Latin America Markets.......................................................................213 Market History ...................................................................................................213 Market Definition................................................................................................213 Market Growth ...................................................................................................213 Leading Firms....................................................................................................213 Market Segmentation............................................................................................213 Key Vendors .........................................................................................................213 Offshore Markets .....................................................................................................213 Evolution of Offshore Markets...............................................................................214 Market History ...................................................................................................214 Market Definition................................................................................................214 Market Growth ...................................................................................................214 Leading Firms....................................................................................................214 Market Segmentation............................................................................................214 Key Vendors .........................................................................................................214 FUTURE PREDICTIONS FOR COMPETITION & ADVICE .........................................215 Online Tools & Advice..............................................................................................215 Growing Personal Computer, Internet, & Broadband Usage .................................215 Blurring of Line Between Advisor & Consumer Technology Solutions...................216 Improved Integration of Various Technology Components....................................216 Rising Online Financial Services Activity & Parallel Need for in Person Advice.....216 Increased Industry Consolidation in Both Tools & Advice Companies & Supporting Service Providers..................................................................................................217 Venture Capital Opportunities in Consumer Centric Financial Advisor Technology & Other Areas ..........................................................................................................217 Online Brokerage .....................................................................................................218 Growing Personal Computer, Internet, & Broadband Usage .................................218 The Increasing Dominance of the Web in Online Brokerage Transactions............219 Continuing Mergers & Acquisitions Activity in Online Brokerage ...........................219 Online Banking & Mortgages....................................................................................220 7 09.03.01 – Markets & Distribution Channels

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Growing Personal Computer, Internet Usage, & Broadband Usage ......................220 Rising Online Financial Services Activity & Parallel Need for in Person Advice.....221 The Increasing Dominance of the Web in Banking & the Growth of the Web in Mortgage Transactions .........................................................................................222 Online Insurance......................................................................................................222 Growing Personal Computer, Internet, & Broadband Usage .................................222 Rising Online Financial Services Activity & Parallel Need for in Person Advice.....223 The Emergence of Online Insurance.....................................................................224 Retail Banks.............................................................................................................224 The Evolution of the Core Deposits & Loans Business .........................................224 Targeting of New Customers & Segments ............................................................224 Refining Branch Structures & Alternative Forms of Distribution.............................224 Recognizing the Importance of Marketing, Advertising, & Branding ......................224 Growth of Incremental Bank Businesses...............................................................225 Consolidation & New Entrants ..............................................................................225 Full-Service Brokerage Firms...................................................................................226 Market Predictions ................................................................................................226 Business Opportunities .........................................................................................226 Independent Reps....................................................................................................226 Rapid Industry Growth ..........................................................................................226 Recruiting War, Payout Rate Pressures, & Value Added Playing Field .................227 Wirehouse Entrants ..............................................................................................229 Continued Profitability Pressures & Continued Consolidation ...............................229 Fee-Based Financial Advisors..................................................................................230 Break-Away Brokers & Rapid Growth in Industry Assets Under Management ......231 Continuing Central Role of Custodians & Difficulty in Penetrating Custody Market231 Continuing Use of Mutual Funds & Individual Securities and Growing Use of Exchange Traded Funds, Alternative Investments, & Wealth Management Products .............................................................................................................................232 Continuing Search for the Technology Holy Grail & Opportunities in Outsourcing.232 Long-Awaited Consolidation in the Industry & the Potential of Producer Groups...233 Insurance Agents .....................................................................................................233 CPA Firms ...............................................................................................................233 Estate Attorneys.......................................................................................................233 Real Estate Agents ..................................................................................................233 Mortgage Brokers ....................................................................................................233 Upscale Channels....................................................................................................233 Increasing Growth in Upscale Channels Industry..................................................233 Evolving Account Minimum Strategies ..................................................................233 Continuing Objective to Deliver Comprehensive Offers.........................................233 Increasing Use of Alternative Investments ............................................................233 Increasing Industry Consolidation .........................................................................234 Institutional Channels...............................................................................................234 English Speaking Countries Markets........................................................................234 Projected Winning Markets ...................................................................................234 Foreign Entry Strategies .......................................................................................236 Venture Capital & Private Equity Opportunities .....................................................236 Europe, Middle East, & Afria Markets.......................................................................237 Projected Winning Markets ...................................................................................237 Mergers & Acquisitions Opportunities ...................................................................239 Venture Capital Opportunities ...............................................................................240 8 09.03.01 – Markets & Distribution Channels

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Asia Pacific Markets.................................................................................................240 Projected Winning Markets ...................................................................................240 Foreign Entry Strategies .......................................................................................241 Venture Capital Opportunities ...............................................................................241 Latin America Markets .............................................................................................241 Offshore Markets .....................................................................................................241

Duplication or distribution of this report, and/or the data in this report, is strictly prohibited without the written consent of Tiburon Strategic Advisors, LLC  9 09.03.01 – Markets & Distribution Channels

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INTRODUCTION, KEY FINDINGS, & EXECUTIVE SUMMARY The introduction, key findings, & executive summary of this report summarizes the entirety of the report and offers a set of useful summary facts. It also serves to address the report’s objectives, Tiburon’s research processes, and the report’s target markets. Context Setting The purpose of this report is to provide readers with an initial understanding of the vast array of markets & distribution channels through which financial services products are delivered, including the self-serve, financial advisor, institutional, & international channels. As flows across these channels have grown the quickest in the various financial advisor channels, this report emphasizes the highlights and developments in retail banks, full-service brokerage firms, independent reps, fee-based financial advisors, other financial advisors (such as insurance agents, CPA firms, & estate attorneys), and several upscale channels (such as private banks, investment banks, and family offices). 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. Several of the underlying market & distribution channel reports (including online brokerage firms, online banks & mortgage companies, online insurance companies, retail banks, full-service brokerage firms, independent reps, fee-based financial advisors, insurance agents, & CPA firms) had previously been published. That version of the report was intended to summarize those reports, take into account the impact of the key driving factors (consumer wealth, institutional markets, and current events), and offer some predictions across the markets & distribution channels. This is Tiburon’s second draft of this report; this draft brings this report into alignment with the revised drafts of many of its underlying reports. Tiburon Research Process Readers should find this report to be both comprehensive and unbiased in its opinions. Tiburon is not a narrowly defined research firm and does not do research on speculation nor to earn substantial revenues selling research reports (all Tiburon reports are offered for sale at $5,000 each, which comes nowhere close to even covering the time invested). Instead, Tiburon conducts extremely detailed research to support critical strategic consulting assignments for its financial services industry clients. As part of Tiburon’s traditional consulting efforts, before focusing on customized client analyses and to get thoroughly immersed in a business segment, Tiburon typically conducts more than a half-dozen research steps: • • • • • • •

Summarize & organize recent industry media coverage Incorporate proprietary learnings from Tiburon’s benchmarking tools Review & incorporate learnings from all key industry firms’ web sites Conduct detailed news searches to round out company views Seek out research & analyst reports to compare and further develop findings Solicit opinions from Tiburon’s executive program members Interview industry participants to confirm or revise findings

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Tiburon will update this report in three-to-six months depending on the evolution of the market and demand for such, so the firm welcomes readers to share any feedback, input, or ideas by email, phone, or in-person. If you send comments, Tiburon will be happy to send you a revised copy of the report. In accordance with Tiburon’s traditional research process, future versions of this report will attempt to take this research further, including more detailed profiles of each firm and more opinions from other industry observers that can help further explain the conclusions. Target Markets The goal of this report was to simplify a wide variety of data on a widely discussed issue. Tiburon’s method (as with all of its work) was simple; call it as best the firm sees it and try to explain the data to the readers. If Tiburon has made any mistakes, the firm apologizes and will seek to correct them in subsequent drafts. Three separate audiences should find this report helpful. If you are an executive at an investment management firm or insurance company (such as a mutual funds or annuities firm), this report should be helpful in understanding how broad market developments may impact the future of your products & services. The report offers a comprehensive overview of this issue, with a view on both institutional and individual advisor impacts. If instead you are an executive at a distribution company (such as a bank or brokerage firm), this report should offer details on an issue faced at both the corporate level and by individual financial advisors. All banks, brokerage firms, insurance agencies, and other advisory organizations are faced with competing both for clients and for talent. Hopefully, this report will offer some competitive insights and allow you to further your own financial advisor strategy. Finally, if you are an individual financial advisor, this report should offer a macro context in which to place your business When Including Its Clearing & 401K Assets, Fidelity Investments and consider this aspect of your Has a Huge Lead in Total Assets business. Hopefully, Tiburon’s thoughts will assist you in Total Assets by Online Brokerage Firm delivering better advice to your Scottrade clients and running your Other Firm s 1% E*Trade 2% Charle s Schwab & 4% Company business more efficiently. 30% Key Findings Below is a list of summary facts from this report:

TD Ameritrade 6%

Online Tools & Advice This section outlines retail Fidelity Investm ents banks. 57% • Between 1995 and 2000, the internet penetration in the United States tripled from less than 15% to almost half of households • Morningstar is the most popular financial planning software product across revenue ranges Source: 3/ 30/06 Hoover’s Web S ite; 3/29/06 The Charles S chwab Corporation Web S ite; 3/29/06 Fidelit y Investm ent s Web S ite; 3/29/06 TD Ameritrade Web Site; 3/ 29/06 E*Trade Web Sit e; 3/ 29/ 06 Scottrade Web Sit e; Tiburon Res earch & Analysis

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Online Brokerage 11 09.03.01 – Markets & Distribution Channels

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This section outlines online brokerage. • The number of discount brokerage firms has now slipped below the 50 mark, down about 35% from the peak of 77 in 2002 • When including its clearing & 401K assets, Fidelity Investments has a huge lead in total assets Online Banking & Mortgages This section outlines online banking & mortgages. • The top ten online banks now have nearly 35 million customers, up 100% since 2002 • Not surprisingly, younger Not Surprisingly, Younger People are Much Mo re Likely to Bank people are much more Online than the Elder Generations likely to bank online than the elder generations Banking Usage • Bank of America is the By Age Range top online bank, with over thirteen million 14% 17% 22% customers banking 43% online Do Not Ba nk Online

86% Online Insurance 83% 78% This section outlines online 57% insurance. • The argument for online Ages 18 - 34 Ages 35 - 49 Ages 50 - 64 Ages 65+ service is centered on lowering cost; a simple administrative customer service task such as checking on a claim could cost a company more than twenty times what it would to be handled online Over Three Quarters of Brokers are Male B ank Online

Source: 3/ 06 Am erican Banker (Synergistics); Tiburon Research & A nalys is

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Wirehouse, Other National, Regional, & Retail Banks Boutique Broker/Dealer Brokers This section outlines retail Licensed by Gender Female banks. 17% • There are 11,426 broadly defined retail banks, including 7,426 traditional retail banks plus 1,000 savings & loans and 3,000 credit unions Male 83% • Broadly defined retail banks generate $60.0 billion revenues, including $45.0 billion by traditional retail banks • Traditional retail banks have $9.0 trillion assets Source: 6/03 Registered Rep; Tiburon Research & Analysis

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Full-Service Brokerage Firms This section outlines full-service brokerage firms. 12 09.03.01 – Markets & Distribution Channels

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• • • • •

The typical broker is 44 years old Over three quarters of brokers are male Almost all brokers have series seven licenses, with only ten percent not obtaining the license There are now over 5,000 brokerage firms, up over 100% in the past twenty five years Today, brokerage firms employ almost 700,000 series 7 registered individuals, compared to just 181,000 30 years ago

Independent Reps This section outlines independent reps. • The independent broker/dealer market is difficult to measure because of the great number of small independent broker/dealers & substantial number of low producing part-time reps, There are 34,005 Broadly Defined Independent Broker/Dealer Reps Producing More Than $100,000 and their other overlapping definition Broadly Defined Independent Broker/Dealer Reps with both insurance Producing More Than $100,000 agents and fee-based financial advisors 34,005 32,385 • There are 147,863 30,843 29,374 27,976 broadly defined independent broker/dealer reps, up 4,000 since 2001 • There are 34,004 broadly defined 2003 2004 2005 2006 2007 independent broker/dealer reps producing more Than $100,000 • Broadly defined independent broker/dealers generate $11.1 billion revenues, up over 35% since 2001 • The average rep firm has $37 million in assets under administration; the largest independent reps have more than three times the average assets ($124 million versus $37 million) Sourc e: 4/28/08 Inve stment N ew s; Tiburon Rese arc h & Analy sis

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Fee-Based Financial Advisors This section outlines fee-based financial advisors. • Two methods exist for sizing the fee-based financial advisor market, including counting the underlying firms and counting the custodians • Defining the fee-based financial advisor market is difficult for many reasons, including overlapping federal & state registration processes, the fact that the registered investment advisor definition includes non-fee-based financial advisors, & the double counting of IBD reps

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The number of feebased financial advisors ranges from 7,518 to 18,159 depending on which segments are included, with 18,159 possibly being the most useful estimate The Charles Schwab Corporation is the largest custodian for fee-based financial advisors Almost all of fee-based financial advisors’ assets under management are invested in mutual funds, equities, & bonds

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

9 ,600

2 0,500

2,341 18,15 9

10,2 00

4,3 00

11,818

N o n -R IA L o o k -

B ro a d l y D e f in e d

10,90 0 7,959

4 41

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M u tu a l F u n d

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T A M P s & F ee -

E x c h a ng e

R e g i s te r e d

I n ve s t m e n t

C o mp a n i e s ,

F i n a n c ia l

P r o g r a ms & I B D

Fin a nc ia l

O nl y F i n a n c i a l

Ad v is o r s

I n st i t u t i o n a l

A d v is o r s

C o mm i s s i o n

I n v e s tm e n t

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wi t h O w n RI A

Ad v is o r s

7 ,5 18

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A l ik e

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Source: 10/7/ 08 Citigroup A nalyst Report ; 1/ 08 Registered Rep (Moss Adams); Tiburon Research & A naly sis

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Insurance Agents This section outlines insurance agents. • Reps utilize a wide Genworth Financial Wealth Management Reports Serving the Most Insurance Com panies, But variety of annuity Many Speak of Brinker Capital and Independent Portfolio Consultants in the Insur ance Market companies, with TAMPs Nationwide (Best of By Number of Insurance Companies Served America), Sun America, and American Skandia Genworth Financial 17 Wealth Management being the leaders • Genworth Financial Loring Ward 3 Wealth management SunGard 2 reports serving the most Lockwood 2 insurance companies, but many speak of Advisor Port 1 Brinker Capital and Russell Invest ment 1 Group independent portfolio consultants in the insurance market Source: 2/5/ 02 Assante Conversation (P ot ts); Tiburon Research & Analysis

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CPA Firms This section outlines CPA firms. • There are 450,000 Certified Public Accountants, with growth having slowed over recent years • Of the 450,000 CPAs, a few more than 175,000 are in private practice or public accounting • Half of all individual income tax returns are completed by paid preparers • The majority of CPAs have less than $25 million in investable assets; this may be explainable by the part-time nature of this business for most CPAs Estate Attorneys This section outlines estate attorneys. • -14 09.03.01 – Markets & Distribution Channels

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Real Estate Agents This section outlines real estate agents. • -Mortgage Brokers This section outlines mortgage brokers. • -Upscale Channels This section outlines upscale channels. • The upscale channels industry includes 74 firms Processing Banks Account for the Greatest Number of Employees • The upscale channels in the Upscale Channels with Nearly 70,000 Employees firms have $35.2 trillion assets under Upscale Channels Firms Employees By Market administration • The upscale channels 68,681 firms generate $24.2 51,080 billion in revenues • Processing banks 14,653 account for the greatest number of employees in the upscale channels with nearly 70,000 employees Processing Banks

I nve stme nt Banks & Boutiq ue Broke ra ge F irm s

Priva te Bank

Se parate Acco unt Man agers

Investment Con sulta nts

Sports Age nts & Busin ess Man agers

Famil y Offices

Institutional Channels This section outlines institutional channels. • --

Sourc e: Tibu ro n R esear ch & An aly sis

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English Speaking Countries Markets This section outlines English speaking countries markets. • US consumer wealth dwarfs that of the United Kingdom & Ireland, with about over four times the assets • The British high net worth & ultra-high net worth classes control nearly threequarters of financial assets • By 2050, the margin between the United Kingdom population over the age of 65 and that of the US will be largely the same • South Africa currently has 55 registered banks, including twelve foreign banks and four mutual banks Europe, Middle East, & Afria Markets This section outlines retail banks. • The European Union Parliament is well diversified across members, with Germany the most heavily represented with one-seventh of parliament members • The US has nearly 50% more wealth than Western and Eastern Europe combined Asia Pacific Markets 15 09.03.01 – Markets & Distribution Channels

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This section outlines Asia pacific markets. • The US has about double the wealth of Japan, China, and India combined • US investments are much heavier in equities than Japanese investments, but not much more so than Indian investments- likely due to that country’s ties with England Latin America Markets This section outlines America markets. • --

The Number of Personal Computers in Circulation will Likely Reach 570 Million by 2013, Up Over 100% Since 2007

Latin

Offshore Markets This section outlines offshore markets. • -Markets & Distribution Channel Conclusions This section outlines conclusions for the markets & distribution channels. • -Online Tools & Advice This section outlines retail banks. • The number of personal computers in circulation will likely reach 570 million by 2013, up over 100% since 2007 • The number of personal computers in use worldwide will reach 2.0 billion by 2014, up over 100% from 2007 • Online tools & advice firms will earn $24 billion by 2013, up 60% since 2007

Personal Computers in Circulation (Millions) 570 515 460 415 370 320 280

2007

2008

2009

2010

2011

2012

2013

Sourc e: Tib uro n R es ea rch & An alysis

© T iburon Strategic Advisors, LLC™

Perhaps Not Surprisingly, Some Estimates Suggest Online Banking will Some Day Reach Three-Quarters Penetration of Consumer Households

Share of Consumer Households with Bank Accounts Using Online Banking 75%

39%

2005

2010

S ource: 11/05 US Banker (Pew I nt ernet and American Life P roject); 12/ 17/ 02 American Banker; 5/ 7/ 02 Bob V eres Media Reviews; 4/ 02 American B anker; 8/ 14/01 A meric an B anker (Tower Group); T ib uron Research & Analysis

Online Brokerage This section outlines online brokerage. • There are four advantages of scale moves in the discount brokerage market that will drive further M&A activity in the future, including increased commission revenues, improved margins, upgraded customers, and added cross-selling opportunities • Through mergers & acquisitions, the number of online brokerage firms will continue to dwindle © Tiburon Strategic Advisors, LLC™

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Online Banking & Mortgages This section outlines online banking & mortgages. • Perhaps not surprisingly, some estimates suggest online banking will some day reach three-quarters penetration of bankers • Online banking usage may eventually rival ATM usage Online Insurance This section outlines online insurance. • Eventually nearly all insurance contracts will be entered over the web, either by consumers or their agents Retail Banks This section outlines retail banks. • Banking industry executives feel that if their banks are in acquisition mode, other banks or thrifts are the likely targets • Some estimates predict that the ten largest retail banks will account for over half of domestic banking assets Full-Service Brokerage Firms This section outlines full-service brokerage firms. • --

Banking Industry Executives Feel that if their Banks are in Acquisition Mode, Other Banks or Thrifts are the Likely Targets Banking Industry Executives By Expectations on Likely Bank Acquisition Targets

Adviso r F ir m 3%

Other 14%

Bro ker age Firm 3% Tran saction Processin g Com pan ies 4%

Bank o r Thrift 61%

Asset Ma nager 5% In surance Agency 10%

Sourc e: 10/8/04 American Ba nker (Ins igh t Expr ess); Tiburon R esearch & A nal ysis

© T iburon Strategic Advisors, LLC™

Independent Reps 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 This section outlines independent reps. Fee-Based Financial Advisors By Expected Three-to-Five Year • Independent Client Asset Growth Rate broker/dealers have over 61,000 producing reps in 2006, growing 33% by 2012 74% • Nearly one-third of 85% independent broker/dealers’ new reps are recruited from other 26% 15% independent broker/dealers Less than $250 Millio n Greater th an $250 Millio n • To be considered a major independent, a firm must have $50 million in annual revenues and employ more than 300 reps; leading firms should also be able to point to revenues per rep exceeding $50,000 Gr eater than 10%

Less than 10 %

Source: 10/7/ 08 Citigroup A nalyst Report ; Tiburon Researc h & Analys is

© Tiburon Strategic Advisors, LLC™1176

Fee-Based Financial Advisors 17 09.03.01 – Markets & Distribution Channels

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This section outlines fee-based financial advisors. • 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, continuing central role of custodians & difficulty in penetrating custody market, continuing use of mutual funds & growing use of exchange traded funds, alternative investments, & wealth management products, increased telephone & virtual wholesaling strategies, opportunities in outsourcing, & finally some consolidation in the industry • 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 • The three largest fee-based financial advisor custodians serve over 67% of feebased financial advisors • Fee-based financial advisor mergers & acquisitions are up over 600% since 1999, with 81 deals taking place in 2007 Insurance Agents This section outlines insurance agents. • -CPA Firms This section outlines CPA firms. • -Estate Attorneys This section outlines estate attorneys. • -Real Estate Agents This section outlines real estate agents. • -Mortgage Brokers This section outlines mortgage brokers. • --

Big Banks Dominate the English Speaking Markets; the Concentration of Share in the Canadian, United Kingdom, and Australian Banking Industries Are At Least Four Times as Intense As That in the US

Share of Banking Assets Controlled By Five Largest Banks 91 % 80 % 74%

Upscale Channels This section outlines upscale channels. • -Institutional Channels This section outlines institutional channels. • --

19%

Can ada

UK

Aus tra lia

USA

Source: 9/29/05 American Banker; 7/14/04 American Banker; 12/5/00 New York Times; 6/7/00 Financial Post; Tiburon Research & Analysis

© Tiburon Strategic Advisors, LLC™

English Speaking Countries Markets This section outlines English speaking countries markets.

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• • •

Big banks dominate the English speaking markets; the concentration of share in the Canadian, United Kingdom, and Australian banking industries makes these markets at least four times as intense as the US There are two fundamental ways for foreign financial services firms to enter the English speaking markets – build or buy The volume of leveraged buyouts is up substantially in the United Kingdom since 2003

Europe, Middle East, & Afria Markets This section outlines retail banks. • Europe has the second Europe Has the Second Largest Share of Worldwide Internet Users largest share of With About 30% worldwide internet users with about 30% World Internet Usage by Locale • The largest bank in Germany is Allianz, trailed somewhat closely by Deutsche Bank Latin Am erica 8%

Africa 2%

Middle East 2%

Asia 37%

North Am er ica 22%

Asia Pacific Markets This section outlines Asia pacific markets. • Asia leads the world in internet users, with nearly 40% share globally • Previously, the Asian credit market has been dominated by a handful of large players such as CitiFinancial, and less reputable firms just a step up from loan sharks Eu rope 29%

So urc e: 4/4 /06 Fina nc ial Ti mes (Internet Wor ld Stats ); Tiburon Resea rch & A nalysis

© T iburon Strategic Advisors, LLC™

Latin America Markets This section outlines America markets • --

Latin

Offshore Markets This section outlines offshore markets. • -Executive Summary The following paragraphs, pulled from the body of this report, include the critical points for all readers.

Between 1995 and 2000, the Internet Penetration in the United States Tripled From Less Than 15% to Almost Half of Households US Household Internet Penetration

52% 64% Households Without Internet

86%

48% 36% Households With Internet

14% 199 5

19 98

200 0

S ource: 1 1/2 1/0 5 Pew Inte rne t & Am eric an Life Proj ec t We b Site; Tiburon Re search & A nalysis

© T iburon Strategic Advisors, LLC™

Online Tools & Advice This section outlines retail banks.

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Between 1995 and 2000, the internet penetration in the United States tripled from less than 15% to almost half of households. There are 239 million personal computers in use, up nearly 8,000% since 1980 and 30% since 2000. There are 1.0 billion personal computers in use worldwide, up more than 20,000% since 1980 and 80% since 2000. 270 million personal computers are sold worldwide each year, up 67% since 2003. The share of US population with internet connectivity has steadily grown from 44% in 2000 to 73% in 2008. Broadband connections now account for 90% of all internet connections, up from 30% since 2007.

The Share of US Population with Internet Connectivity Has Steadily Grown from 44% in 2000 to 73% in 2008 US Population By Propensity to Have Internet Connectivity

31% 42%

No Internet Connection

32%

30%

27%

41%

50%

56%

Morningstar is the most popular financial planning software product across revenue ranges. Its most dominant position is with the smallest reps, where its utilization is almost 60% and its nearest competitor is closer to 30%. Financial Profiles does well amongst all segments except the largest independent reps. CheckFree/Mobius does well amongst the largest reps. Internet Connection

58%

59%

2002

2003

69%

68%

70%

73%

2004

2005

2007

2008

50%

44%

2000

2001

Sourc e: 9/2 9/0 8 Inter net World Stats Web Site; Tiburon R esear ch & Analy sis

© T iburon Strategic Advisors, LLC™

Morningstar Advisor is the most widely visited web site across most broker/dealers, including American Express, LPL, Royal Alliance, SunAmerica Securities, FSC, and SentraSpelman. Raymond James reps show a preference for Yahoo Finance; MSC reps show a preference for CNBC; and Advantage Capital reps show a preference for Smart Money.

In the Late 1990s, Online Brokerage Firms Were Predominantly Taking Assets Away From the Traditional Competitive Playing Field, With Only 10% of Assets From New Investors

1999 New Online Brokerage Accounts by Source Accounts Fr om B a nks, M utua l Funds, or Othe r Fina ncial

N e w C lients 1 2%

Institutions 1 5%

Full-S erv ice Br oker age Clie nts 3 4% Ex isting Disc ount Br ok e rage C lients 39%

Online Brokerage This section outlines brokerage.

Source: 3/ 01 Cerulli Presentation (O’Donnell); Tiburon Research & Analysis

© Tiburon Strategic Advisors, LLC™

online

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In the late 1990s, online brokerage firms were predominantly taking accounts away from the traditional competitive playing field, with only 10% of accounts from new investors. Specifically, in 1999, only 12% of clients that hired an online brokerage firm were new to the investing world. Conversely, 34% of accounts were won from a full-service brokerage, 39% from an existing online brokerage relationship, and the remaining 15% from some other type of financial institution (such as banks, mutual fund shops, insurance companies, et al). The number of discount brokerage firms has now slipped below the 50 mark, down about 35% from the peak of 77 in 2002. Among the Big Five firms, Scottrade offers the lowest flat market order commission to clients at $7, 30% lower than its nearest competitor. In second place is TD Ameritrade at $10.99. From there, it goes E*Trade at $12.99, then The Charles Schwab Corporation and Fidelity Investments at $19.95.

Among the Big Five Firms, Scottrade Offers the Lowest Flat Market Order Commission to Clients at $7, 30% Lower Than Its Nearest Competitor

Big Five Online Brokerage Firms Online Flat Stock Market & Limit Order Commission (1,000 Shares or Less) Scottrade

TD Ameritrade

E*Trade

$7.00

$10.99

$12.99

Charles Schwab & Company

$19.95

Fidelity Investm ents

$19.95

Source: 2/ 06 AA II Newslet ter; 4/30/05 Wall S treet J ournal; 2/05 A AII Newslett er; 6/7/04 Barron’s; 2/04 A AII Newslett er; Tiburon Researc h & Analysis

© Tiburon Strategic Advisors, LLC™

E*Trade offers the cheapest margin of the Big Five brokerage firms, again trailed closely by Scottrade. E*Trade charges 9.49% for a $7,500 debit balance, while Scottrade charges 9.75%, TD Ameritrade charges 10.00%, and Fidelity 10.33%. The Charles Schwab Corporation has the priciest margin, at 11.00%. Three of the Big Five online brokerage firms have substantial bank businesses, led by E*Trade and trailed by The Charles Schwab Corporation and TD Ameritrade. E*Trade’s banking business is known for its cutting edge integration across brokerage and banking, which is widely considered to be the most advanced in industry. Its E*Trade Complete offer allows clients to transfer money to and from accounts, either at the firm or not. Further, the Big Five are also heavily engaged in offering mortgages (through their banking units) and insurance. In insurance, Fidelity Investments owns Insurance.Com, which is one of the largest online distributors of auto insurance in the US. Fidelity Investments dominates the Big Five in nearly every category when it comes to total business. Fidelity has a total of 12.2 million total accounts (The Charles Schwab Corporation has 7.2 million, TD Ameritrade has 6.0 million, E*Trade has 4.3 million, Scottrade has 1.4 million, and the rest of the industry is estimated to have 3.0 million). It has a total of $2.459 trillion in total assets under administration, far above The Charles Schwab Corporation ($1.3 trillion), TD Ameritrade ($256 billion), E*Trade ($187 billion), Scottrade ($44 billion), and all other online brokerage firms (estimated to have $100 billion). Fidelity generates approximately $10.5 billion in total revenues across its businesses, which is double #2 The Charles Schwab Corporation ($5.2 billion), and well

21 09.03.01 – Markets & Distribution Channels

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ahead of TD Ameritrade ($2.0 billion), E*Trade ($2.6 billion), and Scottrade (estimated at $300 million), and all other firms (estimated at $500 million). When including its clearing & When Including Its Clearing & 401K Assets, Fidelity Investments 401K assets, Fidelity Has a Huge Lead in Total Assets Investments has a huge lead in total assets. Specifically, The Total Assets by Online Brokerage Firm Charles Schwab Corporation Scottrade (including its large institutional & Other Firm s 1% E*Trade 2% Charle s Schwab & 4% other businesses) controls 30% Company 30% of industry assets, and Fidelity TD Ameritrade 6% Investments controls 57% (largely due to the more than $1 trillion managed in its mutual fund business, and $500 billion at National Financial, its clearing house). Conversely, the Big Fidelity Investm ents Three-to-Five have a 57% significantly smaller share of the pie, due to their much lesser participation in the clearing, custody, proprietary mutual fund, and 401K markets. TD Ameritrade has 6% of the assets, E*Trade has 4%, and Scottrade has only 1%. All other firms are estimated to control less than 5% of the asset pie when all businesses are included. Source: 3/ 30/06 Hoover’s Web S ite; 3/29/06 The Charles S chwab Corporation Web S ite; 3/29/06 Fidelit y Investm ent s Web S ite; 3/29/06 TD Ameritrade Web Site; 3/ 29/06 E*Trade Web Sit e; 3/ 29/ 06 Scottrade Web Sit e; Tiburon Res earch & Analysis

© Tiburon Strategic Advisors, LLC™

Online Banking & Mortgages This section outlines online banking & mortgages. The number of banks charging online banking fees dropped drastically between 1999 and 2000, to only a third of Not Surprisingly, Younger People are Much Mo re Likely to Bank Online than the Elder Generations them. In 1999, two-thirds of banks charged a fee for online Banking Usage access to their accounts. In By Age Range 2000, that share was cut in half, to only 33% of banks. 14% Do Not Ba nk Online

The top ten online banks now have nearly 35 million customers, up 100% since 2002. Specifically, in 2002 the top ten online banks collectively counted 17 million customers. That figure grew to 20 million by 2003, up to 24 million in 2004, and jumped again to 34 million in 2005.

17%

22%

43%

B ank Online

86%

83%

78% 57%

Ages 18 - 34

Ages 35 - 49

Ages 50 - 64

Ages 65+

Source: 3/ 06 Am erican Banker (Synergistics); Tiburon Research & A nalys is

© Tiburon Strategic Advisors, LLC™

Not surprisingly, younger people are much more likely to bank online than the elder generations. Specifically, 86% of internet users between the ages of 18 and 35 use online banking. 83% of those internet users between the ages of 36 and 49 use online

22 09.03.01 – Markets & Distribution Channels

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banking. 78% of those between 60 and 64 use it. Finally, 57% of internet users above the age of 65 use online banking. Bank of America is the top online bank, with over thirteen million customers banking online. Wells Fargo is about half as successful, with 6.5 million online customers. Both are trailed by JP Morgan Chase (3.2 million customers), Wachovia (2.6 million), and Washington Mutual (2.1 million). Interestingly, ING Direct is competing with the big traditional banks after only a handful of years, with 2.5 million customers effectively tying Wachovia, and leading Washington Mutual. Online Insurance This section outlines insurance.

online

Whereby Virtually All Consumers in 2001 Would Use Online Functionality For Auto Insurance, Less Than 5% Would Actually Apply Online

Consumer Interest in Auto Insurance Online

Whereby virtually all consumers in 2001 would use online functionality for auto insurance, less than 5% would actually apply online. Specifically, in 2000, 88% of consumers reported that they would use the online functionality offered by insurance companies. However, only 5% said that they would actually purchase a policy online.

No

12%

Yes

88%

96%

4% Wo uld U se Online F unctionality

Would Ap ply For Online

Sou rce: 6/8/01 Adv isor Prod ucts P rese nta tion (Gluc k) (Forr ester Res earch) ; Tib ur on R es ea rch & A nalysis

© T iburon Strategic Advisors, LLC™

The argument for online service is centered on lowering cost; a simple administrative customer service task such as checking on a claim could cost a company more than twenty times what it would to be handled online. Specifically, to handle an administrative insurance task, a company could spend $20 for an average ten minute phone call, and includes the cost of labor, real estate, and maintenance costs for the center. Conversely, empowering the consumer to handle the task themselves online would cost the company as little as $1. Retail Banks This section outlines retail banks. Retail banks emerged shortly after the US was founded and held steadfast as the largest financial service companies until the 1980s, when they were challenged by full-service & discount brokers, the market slow down, and now their own strategies. The Glass Steagall Act was adopted in 1933. The Act prevents banks from underwriting stocks and bonds. This gentlemanly division of labor was designed to make sure that a catastrophic failure in one part of the finance industry did not invade every other part. The Act was named after its authors Virginia senator Glass and Alabama congressman Steagall. There are 11,426 broadly defined retail banks, including 7,426 traditional retail banks plus 1,000 savings & loans and 3,000 credit unions.

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There are 154,250 broadly defined retail bank branches, including 94,250 belonging to traditional retail banks and another 60,000 belonging to savings & loans and credit unions. Broadly defined retail banks generate $60.0 billion revenues, including $45.0 billion by traditional retail banks.

There are 154,250 Broadly Defined Retail Bank Branches, Including 94,250 Belonging to Traditional Retail Banks and Another 60,000 Belonging to Savings & Loans and Credit Unions

Broadly Defined Retail Bank Branches (Thousands)

Broadly defined retail banks earn $9.1 billion, including $6.8 billion by traditional retail banks.

There are 39,300 federally chartered retail bank branches, down 50% since 1990.

114.3

Cr edit U nion Branches

Broa dly De fined Retail Bank s

10.0 30.0

There are 7,426 traditional retail banks, down 50% since 1990.

30.0

5.0

74.3

For eign Ba nk With US P res ence Branches

Tr aditiona l Retail Banks

39.3

Fe der ally State C har ter ed Char tered Re ta il Re ta il B ank B ank Br anc hes Branches

Savings & Loans Br anche s

Sourc e: Tiburon Rese arc h & Analys is

© T iburon Strategic Advisors, LLC™

There are 1,143,000 broadly defined retail bank employees, down 50% since 1990. Traditional retail banks have $9.0 trillion assets. Historically banks have had two conflicting channels – their broker/dealers and trust departments. The bank broker/dealers traditionally serve mid-market clients, sell thirdparty mutual funds, and often offer better services at lower prices than bank trust departments. Bank trust departments traditionally serve high net worth clients, sell internal separately managed account and consider themselves investment managers and customer advisors. They are generally better at providing ongoing financial planning services but typically do not give clients a lot of choice in what they do. They control $1 trillion of assets under management, and there are 100,000 bank trust officers. Another source said that some banks establish artificial dividers at $100,000 in client investable assets. Size has some benefits as well as some drawbacks. Some pros of size are diversification of sources of income, geography, products, and costs can be spread across a larger base. The bank is able to make justified technology investments in call centers, mortgage servicing, branches, and ATMs. Problems such as poor loans and regulatory fines have less of an impact. It is easier for banks to produce consistent service, offer competitive pricing, and offer geographic convenience. Cons of size are that a big bank is difficult to manage efficiently. They are more subject to litigation and regulatory scrutiny. They are less nimble than smaller rivals. There is no evidence that efficiency or profitability increases with size. It is difficult to spread a uniform culture. Industry giants in other industries tend to undercut each other and lose money in the process. After a decade of mergers & acquisitions, retail banks and other financial services companies have now spun off some asset management firms.

24 09.03.01 – Markets & Distribution Channels

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The aggregate valuation of foreign financial institutions acquisition of retail banks is $8.3 billion, up 20% since 2001.

The Aggregate Valuation of Foreign Financial Institutions Acquisition of Retail Banks is $8.3 Billion, Up 20% Since 2001 Foreign Financial Institutions Acquisitions of Retail Banks Aggregate Valuation ($ Billions)

Citigroup, Bank of America, and $8.3 JP Morgan Chase are the $7.3 largest banks in assets, each 500-700% bigger than even the $5.1 10th largest bank. Another $3.5 source said that the top three US Banks control more than $0.3 $0.2 40% of the industry’s assets; 200 1 2 002 20 03 200 4 20 05 20 06 another source noted that Citigroup has 18% of the total assets of the 50 largest US banks, with the 50 totaling $5.7 trillion; several foreign banks can also claim huge US assets – Deutsche Bank at $312 billion, ABN Amro at $287 billion, and HSBC at $204 billion; Bank of America and JP Morgan Chase were propelled over the $1 trillion mark with mergers (Fleet Boston and Bank One, respectively). Sourc e: 1/20/08 Thomson Financial Ana ly sis; 9/04 US Banker; Tibur on Re search & Analysis

© T iburon Strategic Advisors, LLC™

Bank broker/dealers may be the ultimate winning channel as separately managed accounts with lower minimums are created, and at the same time, higher-end brokers are recruited and broker/dealers acquired. Banks will likely grow their separately managed accounts business, but they will likely not capture market share nor will separately managed accounts ever surpass proprietary management. Full-Service Brokerage Firms This section outlines full-service brokerage firms.

Over Three Quarters of Brokers are Male Wirehouse, Other National, Regional, & Boutique Broker/Dealer Brokers Licensed by Gender

The typical broker is 44 years old.

Female 17%

Over three quarters of brokers are male. Almost all brokers have series seven licenses, with only ten percent not obtaining the license.

Male 83%

Over half of all brokers have a bachelors degree and some have continued their education to include graduate degrees and advanced professional qualifications. Almost one-quarter have graduate degrees and almost one-fifth have various advanced professional qualifications. Source: 6/03 Registered Rep; Tiburon Research & Analysis

© Tiburon Strategic Advisors, LLC™

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More experienced brokers make more money, with the most experienced making over $240,000 per year, and the least experienced making less than $74,000. There are now over 5,000 brokerage firms, up over 100% in the past twenty five years.

More Experienced Brokers Make More Money, With the Most Experienced Making Over $240,000 Per Year Wirehouse, Other National, Regional, & Boutique Broker/Dealer Brokers Mean Compensation by Years of Experience ($ Thousands)

Today, brokerage firms employ almost 700,000 series 7 registered individuals, compared to just 181,000 30 years ago.

$243 $213 $174 $136

$74

There are four key trends in the full-service brokerage industry, including impact of short-term Less Than 5 5-9 10-14 15-19 20 or More challenges, repositioning of core Years Experience offers, custom recruiting and compensation, and new models emerging. The impact of shortterm challenges include a depressed market, repeated industry stumbles, low account returns, and an increased number of arbitration cases. Repositioning of core offers involves declining commissions, fewer proprietary products, increased a high net worth focus, increased focus on financial planning, fee-accounts, and wealth management, and improved reporting. Custom recruiting and compensation means varying recruiting strategies, decreased compensation, and focused compensation plans. New models emerging include other national firms, regional brokerage firms, and semi-independent models. Note: The mean levels are $59,000, $111,000, $135,000, $122,000, and $141,000 for the same ranges Source: 6/03 Registered Rep; Tiburon Research & Analysis

© Tiburon Strategic Advisors, LLC™

Independent Reps This section outlines independent reps. The independent broker/dealer & independent rep market emerged out of the life insurance industry in the 1960s to 1980s, which has been followed by periods of rapid consolidation, firm restructurings, and maturation & reconsolidation. The independent broker/dealer market is difficult to measure because of the great number of small independent broker/dealers & substantial number of low producing parttime reps, and their other overlapping definition with both insurance agents and feebased financial advisors. The independent broker/dealer market can be defined to include traditional independent broker/dealers, insurance broker/dealers, and/or captive insurance agencies, suggesting a market of 4,800 to 5,000 firms. There are 147,863 broadly defined independent broker/dealer reps, up 4,000 since 2001.

26 09.03.01 – Markets & Distribution Channels

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There are 34,004 broadly defined independent broker/dealer reps producing more Than $100,000. Broadly defined independent broker/dealers generate $11.1 billion revenues, up over 35% since 2001.

There are 34,005 Broadly Defined Independent Broker/Dealer Reps Producing More Than $100,000 Broadly Defined Independent Broker/Dealer Reps Producing More Than $100,000

27,976

29,374

30,843

32,385

34,005

The average rep’s revenues come about half from up-front product commission and lesser 2003 2004 2005 2006 2007 amounts from both trailers and investment advisory fees. Upfront product commissions contribute a little over 50% (53%) to the average independent rep’s revenues, while trailers (21%) and investment advisory fees (18%) account for an additional 20% or so each. Hourly & other fees contribute the remaining 8% to the average rep’s revenues. Some look at this data and conclude that almost 75% of revenues (74%) are from commissionable products; others look at the same data and observe that this means that almost 40% of revenues (39%) of revenues are from recurring sources. Sourc e: 4/28/08 Inve stment N ew s; Tiburon Rese arc h & Analy sis

© T iburon Strategic Advisors, LLC™

The average rep firm has $37 million in assets under administration; the largest independent reps have more than three times the average assets ($124 million versus $37 million). This is a sizable number, especially in comparison to the smallest reps who on average administer just $11 million. The average independent rep firm generates $437,000 in total revenues; the largest rep firms generate more than five times the average revenue amount ($2.4 million versus $437,000). The smallest rep firms, on average, generate just $101,000 in revenues. Nearly one-third of independent reps hold the Certified Financial Planner designation. Fee-Based Financial Advisors This section outlines fee-based financial advisors. 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. It was created to exempt brokers who offered a fee-based compensation arrangement to brokerage clients from being regulated under the Investment Advisors Act of 1940. The Merrill Lynch Rule seemed to mock the need for fiduciary responsibility. Two methods exist for sizing the fee-based financial advisor market, including counting the underlying firms and counting the custodians. The first method of counting fee-based financial advisors is bottom up, but all databases have issues.

27 09.03.01 – Markets & Distribution Channels

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Fee-based financial advisor data can be accessed through bottom up registered investment advisor databases available from the SEC & state registration systems, financial information group, & national regulatory services. The second method of counting fee-based financial advisors is top down, but custody business is more widely spread than many believe. The fee-based financial advisors market is much broader than that held by the traditional custodians. Defining the fee-based financial advisor market is difficult for many reasons, including overlapping federal & state registration processes, the fact that the registered investment advisor definition includes nonfee-based financial advisors, & the double counting of IBD reps. 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.

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

9 ,600

2 0,500

2,341 18,15 9

10,2 00

4,3 00

11,818

N o n -R IA L o o k -

B ro a d l y D e f in e d

10,90 0 7,959

4 41

7 ,5 18

Se c ur it ie s &

S ta t e

R e g i s t e re d

M u tu a l F u n d

F e e -B a s e d

I B D F e e - A c co u n t

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T A M P s & F ee -

E x c h a ng e

R e g i s te r e d

I n ve s t m e n t

C o mp a n i e s ,

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wi t h O w n

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F e e -On l y

F i na n c i al

A l ik e

S e gm e n t s

F e e -On l y

A d v is o r s

A d v is o r s

F i n an c i a l

w ith o u t

(S i n g l e C o u n te d

A d v is o r s

D is c r e ti o n

Da ta )

M a n a g er s , H e dg e F u n d s , C a p tiv e C h a n n e l F e e- A c c o u n t P r o g r a ms

Source: 10/7/ 08 Citigroup A nalyst Report ; 1/ 08 Registered Rep (Moss Adams); Tiburon Research & A naly sis

© Tiburon Strategic Advisors, LLC™

The Charles Schwab Corporation is the largest custodian for fee-based financial advisors. The top three custodians may control only one-third of feebased financial advisor assets. Fee-based financial advisors administer a client process which includes client profiling, asset allocation, investment research & selection, vendor participation, portfolio management & reporting, and client billing.

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

Fee-Based Financial Advisors Incidence of Outsourcing Services By Number of Clients Ass et A lloca tion

50%

Access to Sepa ra te Ac count Manage rs

50%

Perfor manc e Monitoring

50%

10% 25% 50% 10%

S ecur itie s Ac ce ss

100%

50%

10% 27% 13%

20% 10% 25%

20%

20%

25%

25%

20% Ma nager Selection

50%

Pe rformance Re por ting

80%

10% 10% 10% 20% 10%

80%

50%

18% 80%

Back-Off ic e Suppor t Se rvices

80%

65%

Smaller firms are more likely to