C A C e r u l l i A s s o c i a t e s

The Cerulli Report ReleaseS

State of the Independent Broker/Dealers: Channel Sizing and Industry Implications December 2008

With 239 pages and 143 exhibits, this report contains the following sections: • Section 1: Understanding Retail Channels - Defining Retail Channels - Sizing Advisor Channels - Channel Subsegmentation - A Channelized View of Advisor Practices • Section 2: Understanding Independent and Insurance Broker/Dealers - Broker/Dealer Organization - Running a Broker/Dealer - Recruiting - Managed Accounts and FeeBased Adoption • Section 3: Opportunities with Independent and Insurance Broker/Dealers - Independent Broker/Dealer Product Opportunities - The Future of Channels

This report provides analysis of the independent broker/dealer (IBD) channel and where it fits within the broader retail intermediated advice marketplace. This includes Cerulli’s channel definitions and an overall marketsizing of advisor-managed assets by channel. It takes a deep look at IBDs and the challenges these firms face in areas such as technology, recruiting, and managed accounts adoption. It also examines implications for asset managers and other product manufacturers, and provides best practices for working in the IBD channel. NEW: For the first time, Cerulli provides marketsizing of advisor-distributed assets by product and by channel. This report allows firms to: • Understand retail distribution channels and the characteristics of each

• Recognize opportunities and best practices for working with IBDs

• Marketsize the advisor-sold marketplace by channel and by product

• Gain an understanding of how and why advisors move between broker/dealers and channels

• Examine the challenges faced by IBD firms in the current environment

• Identify which market forces are changing the shape of retail channels

Sample Report Exhibit Advisor's Preferred Channel if Advisor Left Current B/D, 2008 Desired Channel if Advisor Left Current B/D IBD Dually registered RIA Wirehouse Regional Insurance Bank

Bank 38.5% 7.7% 15.4% 30.8% 0.0% 0.0% 7.7%

Wirehouse 33.1% 13.2% 18.8% 18.8% 11.4% 0.0% 4.8%

Regional 34.2% 21.1% 18.4% 7.9% 15.8% 0.0% 2.6%

Insurance 35.7% 21.4% 0.0% 14.3% 0.0% 21.4% 7.1%

IBD 35.5% 24.2% 25.8% 12.9% 1.6% 0.0% 0.0%

All Advisors 33.9% 19.9% 18.3% 14.6% 5.3% 4.6% 3.3%

Sources: Cerulli Associates, Cerulli Associates-Financial Planning Association, Cerulli Associates-Investment Management Consultants Association

Table of contents, exhibit list, user examples, and sample pages are attached

Key Findings:

Exclusive data in this report:

• Advisors managed over $11.3 trillion in assets, of which nearly $2 trillion resides in the independent broker/dealer channel.

• Headcounts of advisors and broker/dealers by channel, 2004-2007

• IBDs cite recruiting as their primary source of growth, but are challenged by a stagnating advisor population. Cerulli Associates 699 Boylston Street Boston MA 02116 Tel: +1 617 437 0084 28 Maxwell Road Singapore 069120 Tel: +65 6327 4045 11-15 Betterton Street London WC2H 9BP +44 20 7470 8817

www.cerulli.com

• The IBD channel is increasing in sophistication thanks to technology and a greater use of fee-based pricing. • Asset managers and other product manufacturers are finding increased success with IBDs.

• Marketsizing of advisor-distributed assets by product and by channel • Metrics on broker/dealer attitudes towards recruiting, technology, and training • Organization and insight into key IBDs • Data and analysis of practice types by channel • Advisor attitudes towards firm switching, technology, and product selection

• Despite advisors shifting to independence, the broker/dealer industry continues to consolidate.

• Price: US$12,000 • Faxable order form attached • Purchase includes hardcopy, online access, exhibits in Excel, Key Findings in PDF, PowerPoint presentation, and a web recording of an analyst presentation

To order this report or for more information, log on to our website at www.cerulli.com or contact: Marketing & Business Development +1 617-437-0084 [email protected]

C A C e r u l l i A s s o c i a t e s

The Cerulli Report State of the Independent Broker/Dealers: Channel Sizing and Industry Implications USER SCENARIOS: The following are examples of how this report can be applied to business planning and strategic decision-m making: Scenario 1: An asset management firm is evaluating its wholesaling force structure to see if it is aligned with the shifts occurring in the advisor landscape. Staate of the Indeppendent Brooker/Deaalers: Chaannel Sizing and Industry Impplicaatioons provides answers to the following questions: • How large is the advisor marketplace (overall and by channel) and how has this changed over time? • How significant are the wirehouse firms in terms of assets under management compared to other channels? • Are advisors shifting towards independence? Scenario 2: A managed account third-party vendor is targeting the IBD channel and is need of a thorough examination of the channel, including perspective on how it compares to other intermediary channels. Staate of the Indeppendent Brooker/Deaalers: Chaannel Sizing and Industry Impplicaatioons provides answers to the following questions: • How is technology impacting the growth of the IBD channel? • How and to what extent are IBD advisors using managed accounts in their practices? • How are IBD firms providing managed accounts solutions to their advisors? Scenario 3: A regional broker/dealer firm is contemplating allowing its advisors to affiliate with them as independent contractors, in addition to affiliating as W-2 employees. It seeks insight how other firms are structuring multiaffiliation models and the impetus behind these changes. Staate of the Indeppendent Brooker/Deaalers: Chaannel Sizing and Industry Impplicaatioons provides answers to the following questions: • What kinds of firms currently offer advisors multiple options for affiliation? • Why are firms allowing advisors these options? • What are Cerulli's views on this trend? Scenario 4: A product manufacturer wants to build the business case for senior management that the IBD channel is unique enough in its characteristics and structure to warrant specialized and dedicated marketing and sales support. Staate of the Indeppendent Brooker/Deaalers: Chaannel Sizing and Industry Impplicaatioons provides answers to the following questions: • How does the IBD channel differ from other channels in terms of AUM, product usage, and practice type? • How are other manufacturers structuring themselves to support the IBD channel? • How are firm meeting the specialized needs of IBD firms and advisors?

For more information on how to apply this report to your firm’s unique needs, please contact our Marketing & Business Development team at +1 617-4437-00084, [email protected].

C A C e r u l l i A s s o c i a t e s

The Cerulli Report State of the Independent Broker/Dealers: Channel Sizing and Industry Implications To purchase this report, fill out this form and fax to +1 617-437-1268 or visit our website at www.cerulli.com.

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Special Feature: To view thumbnails of the contents of this report, please visit our website at www.cerulli.com. Go to Order/Info and click on ‘view’ next to the report title.

EXHIBIT 53 ADVISOR PRACTICE TYPE BY CHANNEL, 2008

EXHIBIT 14 HOUSEHOLDS’ MUTUAL FUND ASSETS BY PURCHASE SOURCE, 1990-2007

100%

4.6% 21.6%

17.8%

16.9%

Directly from Mutual Fund Company

8%

19%

21%

20%

2000

24%

15%

Year

D Mutu

29.2% 60

20.0%

10.1% 20.0%

38.5%

80

Defined Contribution Retirement Plan

1990 1995

26.2%

45.3% 61.5%

35.1%

44.3% 50.0%

Sources: Investment Company Institute, Cerulli Associates 40

Cerulli Associates 699 Boylston Street Boston MA 02116 Tel: +1 617 437 0084

Next we look at variable annuities. An estimate of assets by distribution channel is no longer available. However, a year-end 2007 sales estimate attributed a full 98% of variable annuity sales through a financial advisor. As we look at historical data, we see that direct sales of variable annuities have stayed between one and three percent over the last ten years. Given that the variable annuity’s legacy is that of a product that is sold, not bought, we are comfortable using the breakdown of sales figures as a proxy for assets. We apply this percentage to the $1.1 trillion held in VAs at year end 2007 and reduce this number accordingly. We note here that TIAA-CREF, one of the largest issuers of variable annuities is excluded from this asset number as their business model is so remarkable different from most other annuity issues. EXHIBIT 15 VARIABLE ANNUITY TOTAL SALES BY DISTRIBUTION CHANNEL, 1998-2007 2%

3%

2%

2%

11%

12%

11%

24%

27%

26%

36%

36%

25%

25%

100% 11%

80

25%

27%

1%

1% 11%

14%

1%

1%

13%

13%

2%

2%

13%

13%

21%

20%

20%

19%

34%

34%

35%

32%

29%

30%

31%

33%

23%

60 37%

40

17%

0

36%

42%

20

1998

24%

1999

27%

2000

2001

2002

2003

2004

Wirehouse/Regional

Independent Captive

2005

2006

30%

36%

2007

Direct/Other

Bank

Sources: NAVA, VARDS, Morningstar, Cerulli Associates

44

28 Maxwell Road Singapore 069120 Tel: +65 6327 4045

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C State of the Independent Broker/Dealers: A Channel Sizing and Industry Implications

61.5% 51.7% 40.5%

43.3%

56.9%

20

32.3%

2.7%

1.3%

Bank

Wirehouse

1.5%

26.7%

3.3%

33.0% 2.6%

recruiting typically exists at the broker/dealer level as the broker/dealer and advisor both benefit from ensuring there is an appropriate cultural match. However, as we will see momentarily, some broker/dealer networks are strategically positioned with discernable cultural differences between their component firms. In these cases, the network is marketing to advisors at a centralized level and depending on the profile of the advisor and their desires, then matching them up with the appropriate broker/dealer. We will now look at a few specific broker/dealers. What we will see is that the organization of these firms varies greatly. Factors that determine the organization of these firms include geography, culture, and channel. Although these factors are not consistent from network to network, at least one or two will play into how the individual broker/dealers are positioned.

As we see in the previous exhibit, independent broker/dealer advisors tend to have a similar rank order of reasons to other advisors for putting client assets into a variable annuity. However, one area where IBD reps placed greater importance than the advisor population as a whole was in using variable annuities for portfolio diversification. In addition, these advisors gave the lowest weighting to compensation as a factor for using variable annuities. When taken in concert with this channel’s planning legacy, it leads CA to believe that the majority of VA sales within this channel are appropriate and part of an overall client plan. Because of the lower-net-worth client seen in this channel, the guarantee features attached to a variable annuity can be appealing for a client who can less afford to lose money. EXHIBIT 126 IMPORTANCE OF FACTORS WHEN SELECTING A VARIABLE ANNUITY PROVIDER BY CHANNEL, 2008

1.2%

0

Investment Options

Regional

Insurance

IBD

Dually registered

RIA

Money manager

Financial planner

Investment planner

Wealth manager

All advisors

Sources: Cerulli Associates, Cerulli Associates-Financial Planning Association, Cerulli AssociatesInvestment Management Consultants Association

Very important Somewhat important

LPL

Not important

EXHIBIT 64 LPL ORGANIZATIONAL CHART, 2008

Financial Strength Rating

Bank 58.3% 41.7% 0.0%

Bank

Very important

33.3%

Somewhat important

66.7%

Wirehouse 75.9% 19.6% 4.5%

Wirehouse 75.9%

Regional 75.0% 18.8% 6.3%

Regional

54.5% 40.9% 4.5%

Insurance

IBD 89.8% 8.2%

Dually Registered 88.9% 0.0%

2.0%

11.1%

IBD

Dually Registered

RIA 81.0% 14.3%

All Advisors 75.5% 20.5%

4.8%

4.0%

RIA

All Advisors

63.6%

87.5%

66.7%

65.0%

36.4%

12.5%

22.2%

25.0%

0.0%

5.4%

0.0%

0.0%

0.0%

11.1%

10.0%

2.1%

Bank

Wirehouse

Regional

Insurance

IBD

Dually Registered

RIA

All Advisors

18.8%

86.7%

Insurance

Not important

Pricing

13.3%

74.6% 23.3%

LPL

As we look at these same practice types across channels, perhaps the most striking number is the incidence of financial planners in the independent broker/dealer channel. Many product manufacturers, when segmenting their salesforces, still refer to the independent broker/dealer channel as “the planner channel” because of IBD’s legacy of providing comprehensive planning. As we have discussed, many of the early entrants to this channel sought out independent affiliations so they could practice comprehensive financial planning as more structured broker/dealers were not yet accepting of this business model. The breadth of the investment planner model is seen in contrasting the wirehouses with insurance broker/dealer advisors. Wirehouse advisors have a more sales-oriented legacy, so despite having wealthy clients, these advisors are less likely to be doing comprehensive planning with their clients, but providing fairly sophisticated modular advice to their wealthier clients. Conversely, insurance broker/dealer advisors tend to be slightly less sophisticated than advisors in other channels and, as such, we see many of these advisors qualifying as investment planners by providing the bare minimum of advice to gain credibility with their clients (e.g., a retirement or education planning calculator). 88

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C State of the Independent Broker/Dealers: A Channel Sizing and Industry Implications

Traditional LPL Reps Independent B/D

Uvest Banks

Pacific Life B/Ds Independent B/Ds, Non-LPL Clearing

Mutual Service Corp W. Palm Beach, FL

Waterstone Financial Chicago, IL

Independent RIA

Very important

50.0%

63.1%

81.3%

68.2%

85.4%

66.7%

75.0%

73.3%

Somewhat important

50.0%

33.3%

12.5%

22.7%

14.6%

22.2%

10.0%

22.0%

Not important

0.0%

3.6%

6.3%

9.1%

0.0%

11.1%

15.0%

4.7%

IBD

Dually Registered

RIA

All Advisors

Clearing Living Benefits

Associated Securities Los Angeles, CA

75.0%

Somewhat important

16.7%

68.2%

85.7%

66.7%

35.0%

27.3%

10.2%

11.1%

40.0%

31.3%

4.5%

4.1%

22.2%

25.0%

10.2%

Regional

Insurance

IBD

Dually Registered

RIA

All Advisors

Very important

33.3% 41.7% 25.0%

Bank

Very important

41.7%

Somewhat important

41.7%

Not important

Annuitization Options

24.3%

45.5% 42.7% 11.8%

Wirehouse 32.4% 50.0%

56.3%

Insurance

8.1%

Wirehouse

Somewhat important

67.6%

Regional

8.3%

Bank

Wholesaler Relationship

LPL’s legacy is as an independent broker/dealer. The firm was formed through a merger of two smaller IBDs (Linsco and Private Ledger) to create the core of the existing firm. A portion of the firm was then sold to a private equity firm. As discussed earlier, this allowed LPL to begin acquiring additional broker/dealers and expanding their business in order to build scale. The acquisitions and announcements include: • Merger with Uvest, a leading bank third-party marketer in late 2006

Wirehouse

Not important

Death Benefits

Not important

Sources: Cerulli Associates

Bank

Very important

12.5%

43.8% 37.5% 18.8%

Regional 25.0% 56.3%

45.5% 50.0% 4.5%

Insurance

50.0% 43.8%

18.8%

23.8%

Wirehouse

Regional

Insurance

11.1% 44.4%

IBD

Dually Registered

38.8% 51.0%

17.6%

Bank

44.4%

6.3%

28.6% 47.6%

16.7%

27.8% 50.0%

Dually Registered

43.6% 12.0%

RIA

All Advisors

11.8% 35.3%

55.6%

IBD

44.4%

22.2%

22.2% 22.2%

10.2%

70.9% 18.9%

32.0% 48.1%

52.9%

19.9%

RIA

All Advisors

Very important

25.0%

32.1%

18.8%

33.3%

25.0%

25.0%

30.0%

27.7%

Somewhat important

33.3%

44.0%

50.0%

47.6%

58.3%

12.5%

45.0%

48.2%

Not important

41.7%

23.9%

31.3%

19.0%

16.7%

62.5%

25.0%

24.1%

Bank

Wirehouse

Regional

Insurance

IBD

Dually Registered

RIA

All Advisors

Compensation Very important

0.0%

11.0%

25.0%

13.6%

19.1%

0.0%

10.5%

14.6%

Somewhat important

83.3%

61.5%

37.5%

63.6%

63.8%

66.7%

26.3%

59.7%

Not important

16.7%

27.5%

37.5%

22.7%

17.0%

33.3%

63.2%

25.8%

Sources: Cerulli Associates, Cerulli Associates-Financial Planning Association, Cerulli AssociatesInvestment Management Consultants Association C A

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File: Eblast 12/08

TABLE OF CONTENTS

INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 REPORT SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Report Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Report Roadmap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 METHODOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Quantitative Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Qualitative Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 KEY FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 SECTION 1: UNDERSTANDING RETAIL CHANNELS . . . . . . . . .19 OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 DEFINING RETAIL CHANNELS . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 Defining Financial Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24 Counting Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 Wirehouses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Registered Investment Advisors (RIAs) . . . . . . . . . . . . . . . . . . . . . . . . . .29 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 Insurance Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 Independent Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Regional Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 Advisor Headcounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 SIZING ADVISOR CHANNELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Product Sizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Channel Sizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57 CHANNEL SUBSEGMENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . .58 Independent Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59 Aggregators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 CPA Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 Niche Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 Corporate Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 Insurance Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 Regional Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72 Localized Middle-Class Marketer . . . . . . . . . . . . . . . . . . . . . . . . . .73 Private Client Groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

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Regional Investment Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76 A CHANNELIZED VIEW OF ADVISOR PRACTICES . . . . . . . . . .78 Advisor Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79 Assets Under Management and Client Net Worth . . . . . . . . . . . . . .82 Advisor Practices and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . .87 Advisor and Practice Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95 SECTION 2: UNDERSTANDING INDEPENDENT AND INSURANCE BROKER/DEALERS . . . . . . . . . . . . . . . . . . . . . . . . . .96 BROKER/DEALER ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . .96 Broker/Dealer Functional Roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97 Network Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103 LPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107 AIG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 ING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111 The Private Equity Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113 RUNNING A BROKER/DEALER . . . . . . . . . . . . . . . . . . . . . . . . . . . .114 Clearing Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115 Switching Clearing Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .120 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121 Emerging Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .126 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Advisory Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131 Practice Management and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134 Training Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .136 Broker/Dealers' Future Role in Practice Management . . . . . . . . . .138 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .140 RECRUITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141 The Advisor Lifecycle: Recruiting from Independent and Insurance Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145 Breakaway Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .151 Case Study: LPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154 Channel Move Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .156 Asset Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159 Recruiting Tactics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161 Upfront Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162 Insurance Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .165

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Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .165 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167 MANAGED ACCOUNTS AND FEE-BASED ADOPTION . . . . . . . .168 Independent and Insurance Broker/Dealer Programs . . . . . . . . . . . . . . . .171 Third-Party Vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181 Unified Managed Accounts (UMAs) . . . . . . . . . . . . . . . . . . . . . . . .185 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .188 SECTION 3: OPPORTUNITIES WITH INDEPENDENT AND INSURANCE BROKER/DEALERS . . . . . . . . . . . . . . . . . . . . . . . . . .189 INDEPENDENT BROKER/DEALER PRODUCT OPPORTUNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189 Product Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .192 Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193 Variable Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .195 Alternative Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .199 Product Manufacturer Wholesaling Strategy . . . . . . . . . . . . . . . . . . . . . .203 Salesforce Channelization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203 Addressing Firm Nuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .206 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211 THE FUTURE OF CHANNELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .212 Merger and Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .213 Insurance Company Broker/Dealers and Networks . . . . . . . . . . . .213 Independently Owned and Mid-Sized Independent Broker/Dealers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .216 Reviewing Recent Activity and Future Outlook . . . . . . . . . . . . . . .219 Channel Neutrality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .222 Dually Registered Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .222 Flexible Affiliation Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .224 RIA Service Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .225 The Entrepreneur of the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .228 Key Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .232 PROGNOSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .233 INDEX OF COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .235

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INDEX OF EXHIBITS

1. Marketshare of Retail Client Assets by Distribution Method, 2002-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 2. Defining Retail Broker/Dealers and RIAs, 2007 . . . . . . . . . . . . . . . . .25 3. Wirehouse Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . .28 4. Retail-Focused RIA Market Segmentation, 2007 . . . . . . . . . . . . . . . . .29 5. Top 15 Bank Broker/Dealer Programs by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 6. Selected Bank Broker/Dealer Platform Reps, 2007 . . . . . . . . . . . . . . .31 7. Selected Bank Third-Party Marketers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 8. Top 15 Insurance Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 9. Top 25 Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 10. Broker/Dealer Networks, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 11. Top 15 Regional Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 12. Number and Percentage of Advisors by Channel, 2007 . . . . . . . . . .39 13. Historical Change in Total Advisors by Channel, 2004-2007 . . . . . .40 14. Households’ Mutual Fund Assets by Purchase Source, 1990-2007 . .44 15. Variable Annuity Total Sales by Distribution Channel, 1998-2007 . .44 16. Variable Annuity Industry Asset Growth (excluding TIAA-CREF), 1997-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 17. Retail Separate Account Assets, 2007 . . . . . . . . . . . . . . . . . . . . . . . .46 18. ETF Distribution, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46 19. Advisor-Distributed Retail Asset Management Products, 2007 . . . . .47 20. Advisor Product Mix, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 21. Advisor-Distributed Defined Contribution Plans, 2007 . . . . . . . . . . .48 22. Advisor Business Mix, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49 23. Advisor Marketplace Summary, 2007 . . . . . . . . . . . . . . . . . . . . . . . .50 24. Dually Registered Advisors: Assets Held at RIA and BD, 2007 . . . .51 25. Assets per Channel, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51 26. Advisor Product Mix per Channel, 2007 . . . . . . . . . . . . . . . . . . . . . .52 27. Assets by Product by Channel, 2007 . . . . . . . . . . . . . . . . . . . . . . . . .54 28. Product Marketshare by Channel, 2007 . . . . . . . . . . . . . . . . . . . . . . .56 29. Advisors by IBD Segment, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

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30. Top Aggregator Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61 31. Top CPA Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62 32. Selected Niche Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 33. Mega Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64 34. Top 10 Insurance Legacy Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 35. Top 10 Institutional Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66 36. Top 10 True Independent Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67 37. Advisors by Insurance Segment, 2004-2007 . . . . . . . . . . . . . . . . . . .70 38. Top 10 Open Distribution Insurance Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70 39. Selected Closed Distribution Insurance Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71 40. Advisors by Regional Segment, 2004-2007 . . . . . . . . . . . . . . . . . . . .72 41. Top Localized Middle-Class Marketer Regional Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . .73 42. Selected Private Client Group Regional Broker/Dealers by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74 43. Top 10 Regional Investment Banks by Advisor Headcount, 2004-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75 44. Advisors by Revenue Source, 2002-2008 . . . . . . . . . . . . . . . . . . . . .79 45. Advisor by Revenue Source, by Channel, 2008 . . . . . . . . . . . . . . . . .80 46. Advisor Compensation Breakdown by Channel, 2008 . . . . . . . . . . .81 47. Advisor Assets Under Management by Channel, 2008 . . . . . . . . . . .82 48. Advisor Core Market by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . .83 49. Advisor Assets Under Management by Core Market, 2008 . . . . . . . .84 50. Advisor Assets Under Management by Revenue Source, 2008 . . . . .85 51. Advisor Time Allocation by Channel, 2008 . . . . . . . . . . . . . . . . . . . .86 52. Practice Type Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87 53. Advisor Practice Type by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . .88 54. Services Currently Provided by Channel, 2008 . . . . . . . . . . . . . . . . .89 55. Advisor Business Model by Channel, 2008 . . . . . . . . . . . . . . . . . . . .90 56. Advisor Team Staffing by Channel, 2008 . . . . . . . . . . . . . . . . . . . . .91 57. Number of Clients Per Advisor Practice by Channel, 2008 . . . . . . . .92

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58. Licenses and Designations Advisors Currently Hold by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93 59. Advisor Age Comparisons by Channel, 2008 . . . . . . . . . . . . . . . . . .94 60. Ratio of Advisors to Broker/Dealer Home Office Positions, by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98 61. Ratio of Advisors to Broker/Dealer Home Office Positions, by Size, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100 62. Expected Change in Staffing for Broker/Dealer Functional Roles, by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102 63. Network Organization, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104 64. LPL Organizational Chart, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107 65. AIG Organizational Chart, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110 66. ING Organizational Chart, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . .111 67. Greatest Business Threat for Broker/Dealers, by Channel, 2008 . . .114 68. Broker/Dealer Technology Strategy, 2008 . . . . . . . . . . . . . . . . . . . . .115 69. Top Clearing Firms by Broker/Dealer Clients, 2008 . . . . . . . . . . . . .116 70. Top Clearing Firms’ Estimated Market Share, by Channel, 2007 . . .117 71. Reason for Choosing Primary Clearing Firm, 2008 . . . . . . . . . . . . . .118 72. Reason for Choosing Primary Clearing Firm, by Channel, 2008 . . .118 73. Reasons for Using Multiple Clearing Firms, 2008 . . . . . . . . . . . . . .119 74. Top Producing Advisors, by Tech Spending per Advisor, 2007 . . . .122 75. Technology Expenditures as a Percentage of Revenues, by Channel, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122 76. Technology Expenditures per Advisor, by Channel, 2007 . . . . . . . . .123 77. Advisors’ Most Desired Technology Change by Channel, 2008 . . . .124 78. Broker/Dealer Technology Strategy, by Size, 2007 . . . . . . . . . . . . . .125 79. Source of Advisor Technology, by Channel, 2008 . . . . . . . . . . . . . . .126 80. Broker/Dealer Supervision Ratios, by Channel, 2008 . . . . . . . . . . . .129 81. Activities Permitted Under Corporate RIAs, by Channel, 2008 . . . .132 82. Greatest Advisor Training Need, by Channel, 2008 . . . . . . . . . . . . .135 83. Methods Used by Broker/Dealers for Training, by Channel, 2008 . .136 84. Broker/Dealers Expected Sources of Revenue Growth, 2008 . . . . . .141 85. Factors That Would Cause an Advisor to Look for a New Broker/Dealer, by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . .143 86. Channels From Which Broker/Dealers Recruited New Advisors, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .145 87. Insurance and Independent Channel Advisor Lifecycle, 2007 . . . . . .145 88. Growth in Advisors, by Broker/Dealer Sub-Segment, 2008 . . . . . . .148 89. Advisor Moves After Leaving Independent and Insurance Broker/Dealers, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149

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90. Advisor’s Preferred Channel if Advisor Left Current B/D, 2008 . . .152 91. Advisor Moves After Leaving Wirehouse and Regional Broker/ Dealers, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .153 92. Most Popular Firms for New LPL Advisors, 3Q2008 . . . . . . . . . . . .155 93. Most Popular Channels for New LPL Advisors, 3Q2008 . . . . . . . . .156 94. Primary Reason Advisor Switched Broker/Dealer Firms, by Channel of Firm Left, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157 95. Primary Reason Advisor Switched Broker/Dealer Firms, by Channel of Firm Joined, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158 96. Advisors: Percent of Advisor’s Book Taken to New Firm, by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159 97. Broker/Dealers: Percent of Advisor’s Book Taken to New Firm, by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .159 98. Broker/Dealers: Source of New Advisors, by Channel, 2008 . . . . . .161 99. Recruiting Staff at Independent Broker/Dealers, by Size, 2008 . . . .161 100. Broker/Dealers Offering Forgivable Loans, by IBD Subsegment, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163 101. IBD Advisor Growth by Forgivable Loan Offering, 2007 . . . . . . . .164 102. Broker/Dealers: Factors That Would Cause an Advisor to Look for a New Broker/Dealer, by Channel 2008 . . . . . . . . . . . . . . . . . . . . . .166 103. Managed Account Assets by Distribution Channel, 1997 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .168 104. Total Managed Accounts Assets by Channel Scorecard, 1997 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169 105. Percentage of Client Assets Held in Managed Accounts by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170 106. Expected Future Use of Fee-Based Managed Accounts By Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .170 107. Top Independent Broker/Dealer Sponsors by Managed Account Assets, 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171 108. Independent Broker/Dealer Mix of Managed Account Assets by Program Type, 2000 - 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . .174 109. Mutual Fund Advisory Program Assets by Channel, 19972Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175 110. Mutual Fund Advisory Program Average Account Size by Channel, 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .176 111. Managed Account Discretionary vs. Nondiscretionary Assets by Channel, 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .177 112. Advisor Opinion of Managed Account Types by Channel, 2008 . . .179 113. Advisors Who Outsource Any of the Portfolio Construction Process by Practice Type, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181

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114. Top Advisory Third-Party Managed Account Providers, 2Q 2008 .182 115. Third-Party Vendor Mix of Managed Account Assets by Program Type, 2000 - 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .183 116. Asset Manager Opinion of Channel Growth Potential through Fee-Based Advisory Relationships, 2008 . . . . . . . . . . . . . . . . . . . . .185 117. UMA Assets by Channel, 2Q 2008 . . . . . . . . . . . . . . . . . . . . . . . . .186 118. UMA Average Account Size by Channel, 2Q 2008 . . . . . . . . . . . . .186 119. Advisor Opinions of Unified Managed Accounts by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187 120. Role of B/D (or Service Agent) in Portfolio Construction Process by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .190 121. Advisor Determination of Asset Allocation Strategies by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191 122. Most Important Factors in Choosing to Invest with an Asset Manager by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193 123. Number of Asset Managers Used by Advisors by Channel, 2008 . .195 124. Advisor Product Mix by Core Market, 2008 . . . . . . . . . . . . . . . . . .195 125. Reasons Advisors Allocate Client Assets to a Variable Annuity by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .196 126. Importance of Factors When Selecting a Variable Annuity Provider by Channel, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .197 127. Actions Taken by Broker/Dealers in Response to Rule 2821, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .198 128. Advisor Opinion of Alternative Investments by Channel, 2008 . . .200 129. Plans to Increase Alternatives Allocation by Channel, 2008 . . . . . .201 130. Salesforce Channelization, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . .204 131. Attributes of Selected Independent Broker/Dealers, 2008 . . . . . . . .206 132. National Account Manager Time Allocation, 2008 . . . . . . . . . . . . .210 133. Top Selling Variable Annuity Issuers by New Sales and Affiliated Broker/Dealers and Advisors, 2007 . . . . . . . . . . . . . . . . . . . . . . . . .215 134. Number of Independent Broker/Dealer Firms by Advisor Headcount, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217 135. Challenges for Mid-Sized Broker/Dealers, 2008 . . . . . . . . . . . . . . .217 136. Ages of Selected True IBD CEOs, 2008 . . . . . . . . . . . . . . . . . . . . .218 137. Independent Broker/Dealer Acquisitions, 3Q 2008 . . . . . . . . . . . . .219 138. Percentage of Advisors Working for Top 25 Parent Companies, 2004-2008E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .221 139. Dually Registered RIA Firms and Assets, 2004-2007 . . . . . . . . . . .222 140. Selected “Channel Neutral” Broker/Dealers, 2008 . . . . . . . . . . . . .224 141. RIA Service Agent Clients and Assets, 2Q 2008 . . . . . . . . . . . . . . .226

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142. Service Agent Services Offered, 2Q 2008 . . . . . . . . . . . . . . . . . . . .227 143. Possible Future Independent Broker/Dealer Business Models, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .231

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REPORT SCOPE

State of the Independent Broker/Dealers: Channel Sizing and Industry Implications, the most recent study in The Cerulli ReportTM series, examines independent contractor broker/dealers and their affiliated advisors. A number of factors are contributing to the growth and maturation of this channel. The report begins with a discussion of how Cerulli defines and sizes retail intermediary channels and assesses the opportunity associated with each. The report continues to examine the factors contributing to the growth of independent broker/dealers, future challenges for this channel, and the opportunities for firms looking to address the channel. Report Beneficiaries Strategies outlined in this report should help various types of firms operating within the financial services industry: • Asset Managers: firms—including mutual fund companies, banks, institutional money managers, insurers, and separate account managers—that distribute their products through the various intermediary channels and wish to understand and address independent broker/dealers and their advisors. • Broker/dealers: firms—including wirehouse, regional broker/dealer, independent broker/dealer, bank broker/dealer, and registered investment advisor firms—that wish to gain a better understanding of the trends shaping the independent broker/dealer channel. The report also contains best practices for firms seeking to position themselves for advisor recruiting. • Clearing firms: firms that process transactions for broker/dealers and want to better understand the issues affecting their clients and prospective clients • Software and service providers: firms that provide services to independent broker/dealers and their advisors and wish to better understand the challenges in this channel.

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Report Roadmap State of the Independent Broker/Dealers: Channel Sizing and Industry Implications has several sections: Section 1: Understanding Retail Channels • Defining Retail Channels explains how Cerulli defines and segments traditional retail distribution channels and lays out the characteristics of each channel. • Sizing Advisor Channels sizes retail distribution channels and examines at the product opportunity within each. • Channel Subsegmentation takes a deeper look at the firms that comprise the independent, insurance, and regional channels and creates subsegments of broker/dealer firms • A Channelized View of Advisor Practices looks how channel trends and differences apply to individual advisor practices and what the implications are for firms interested in the independent broker/dealer channel. Section 2: Understanding Independent and Insurance Broker/Dealers • Broker/Dealer Organization examines the variety of functional roles within a broker/dealer and how staffing varies between channels. The chapter also looks at how large networks of broker/dealers are organized. • Running a Broker/Dealer looks at a number of the issues specifically associated with being in business as a broker/dealer, including clearing firms, technology, compliance, and training. The chapter details how independent broker/dealers are being forced to evolve in these areas, in spite of shrinking margins. • Recruiting examines how firms are attracting experienced advisors. It

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offers suggestions for how different firms can position themselves and an outlook for the breakaway advisor. • Managed Accounts and Fee-Based Adoption addresses fee-based managed account platforms within independent broker/dealers as well as advisor attitudes towards the programs. The chapter includes an examination of third-party vendors who often provide the infrastructure for these programs in the independent and insurance broker/dealer channels. Section 3: Opportunities with Independent and Insurance Broker/Dealers • Independent Broker/Dealer Product Opportunities examines best practices for wholesaling the independent broker/dealers and their advisors. The chapter details how these advisors make product decisions and looks at the outlook for a few key products. • The Future of Channels examines factors that will shape the future of the independent broker/dealer channel. The chapter offers an outlook for future merger and acquisition activity and details how broker/dealers are shifting their business models.

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METHODOLOGY

The following analysis of the independent broker/dealer channel relies on a combination of quantitative and qualitative analyses conducted by Cerulli Associates. Our research draws upon our own market insight and proprietary data, as well as our analysis of third-party information sources. Quantitative Data A proprietary survey of the population of financial advisors serves as the foundation for identifying industry trends. These surveys include both Cerulli’s internal efforts as well as partnerships with the Financial Planning Association (FPA), Investment Management Consultants Association (IMCA), and other industry organizations. Broker/dealers can participate in these surveys in return for a complimentary Summary of Key Findings; for further information, contact Cerulli Associates. Also included in this report are the results of Cerulli Associates’ survey of broker/dealers, conducted in conjunction with the Financial Services Institute (FSI), a trade organization for independent contractor broker/dealers. Other data was collected from a wide variety of third-party sources and other relevant Cerulli surveys. CA administers its surveys through our proprietary data-gathering engine at www.cerullisurveys.com. Qualitative Research Qualitative Interviews As part of our ongoing research initiatives, CA analysts regularly interview key executives from asset management firms and distributors, as well as other industry observers. For the purposes of this report, CA analysts conducted a number of qualitative conversations with executives at firms involved with the independent broker/dealer channel. This included sales managers at asset managers, executives at broker/dealers, clearing firms, and third-party managed account vendors. We also spoke with a number of

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financial advisors that currently work at independent broker/dealers or considering making the move to independence. All interviews were conducted on a background basis and without attribution. The conversations reinforce the findings of our survey work and provide additional valuable insights reflected in this study. As with all Cerulli ReportsTM, additional information in this report was obtained from third-party public and nonconfidential sources that Cerulli Associates believes to be reliable, and we have made every reasonable attempt to verify it; however, CA does not guarantee its accuracy or completeness.

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SAMPLE SECTION from THE CERULLI REPORT STATE OF THE INDEPENDENT BROKER/DEALERS: CHANNEL SIZING AND INDUSTRY IMPLICATIONS

rely on their clearing provider, but the majority of broker/dealers take some role in developing technology for their advisors. The primary challenge CA observes are the paradoxical trends of integration and open architecture. The buzz in the independent advisory industry (RIAs and IBDs alike) has been that of integration. As we see below, better integration between software programs is the most desired technology improvement by independent and insurance advisors and RIAs. An advisor might use multiple applications in their practice, such as a CRM system, financial planning system, or performance reporting to name a few. However, these are often all independent applications meaning they do not talk to each other and the advisor and his or her staff have to rekey data and client information as they moved from application to application. Clearly this stands in direct opposition to the trends of scalability and efficiency that we introduced earlier in this section. EXHIBIT 77 ADVISORS’ MOST DESIRED TECHNOLOGY CHANGE BY CHANNEL, 2008 Technology Change

Wirehouse

Regional

IBD/Insurance

Dually Registered

RIA

All Advisors

Multiple programs should be better integrated

21.4%

19.5%

32.8%

41.2%

50.9%

30.1%

Better performance reporting systems

21.8%

29.3%

20.7%

17.6%

16.4%

20.9%

It should be more customizable

15.4%

12.2%

13.8%

8.8%

12.7%

14.1%

Better CRM systems

14.4%

19.5%

12.1%

5.9%

9.1%

12.5%

Better financial planning systems

16.5%

7.3%

10.3%

11.8%

3.6%

11.8%

It should be simpler to use

10.5%

12.2%

10.3%

14.7%

7.3%

10.6%

Sources: Cerulli Associates, Cerulli Associates-Financial Planning Association, Cerulli AssociatesInvestment Management Consultants Association

As their name suggests independent broker/dealers promise their advisors independence. Many of these advisors have specific preferences about what application they wish to use for specific purposes. As their staff may already be trained in how a specific program fits into their business. If they are offered a fully integrated technology platform, they may still prefer to do manual work if the integrated platform doesn’t include their application of choice. Broker/dealers with leading edge tech platforms, clearing firms, and software providers alike have worked around this by enabling downloads between programs. Clearing firms realize that they must allow an advisor to download data into the most popular software applications in order to drive this efficiency. Clearing firms must be flexible on this point—as we see, there is little consensus among broker/dealers regardless of size or channel as to what is the optimal technology strategy. In addition, new software providers

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In addition, we are faced with a graying advisor population without fresh replacements being readied. As they near retirement, advisors in more structured channels are beginning to realize that their practice will be far more transferable in an independent channel than if they are the employee of a large firm. In more structured channels, there is an ongoing dispute around whether a client belongs to the broker/dealer or the advisor. In more independent channels, broker/dealers view the advisor as the client and retail investors as belonging to the advisor. As such, advisors can transfer their practices for a richer price and more easily in independent channels than they could as an employee of a large firm. EXHIBIT 90 ADVISOR’S PREFERRED CHANNEL IF ADVISOR LEFT CURRENT B/D, 2008 Desired Channel if Advisor Left Current B/D

Bank

Wirehouse

Regional

Insurance

IBD

IBD

38.5%

33.1%

34.2%

35.7%

35.5%

33.9%

Dually registered

7.7%

13.2%

21.1%

21.4%

24.2%

19.9%

RIA

15.4%

18.8%

18.4%

0.0%

25.8%

18.3%

Wirehouse

30.8%

18.8%

7.9%

14.3%

12.9%

14.6%

Regional

0.0%

11.4%

15.8%

0.0%

1.6%

5.3%

Insurance

0.0%

0.0%

0.0%

21.4%

0.0%

4.6%

Bank

7.7%

4.8%

2.6%

7.1%

0.0%

3.3%

All Advisors

Sources: Cerulli Associates, Cerulli Associates-Financial Planning Association, Cerulli AssociatesInvestment Management Consultants Association

As we see above, wirehouse and regional advisors are interested in independence. When asked what their preferred channel would be in they were to leave their current firm, better than half of wirehouse advisors preferred going to an independent channel (IBD, dual registration, or RIA). In fact, the numbers are even steeper for regional advisors, as nearly 75% of these advisors preferred one of these three channels. Independence is appealing to advisors for all the reasons we have discussed. They are no longer an employee, but building an asset of value. In addition, they have seen their peers make the same move and thrive. Finally, there are plenty of receptive organizations eagerly waiting to help them make this transition.

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