090420 a new financial order - 114 page abridged version for financial markets

IBM Global Business Services

© Copyright IBM Corporation 2010

IBM Institute for Business Value

Toward transparency and sustainability:Building a new financial order

An 18-month study of the future of the financial markets industry

11/21/20102



Introduction

Results

Appendix

Additional insights

Asset and volume trends

Full CFA Institute survey results

Table of Contents

Table of contents

11/21/20103



We surveyed over 2,750 industry participants and conducted secondary research to determine how firms must prepare for the future

� Our analysis focused on selected financial

markets industry participants1:

- Buy side

- Sell side

- Processors

- Others: academics, think tanks, industry

associations, regulatory bodies

� We surveyed 2,754 industry participants2:- Qualitative interviews of 185 executives and

government officials

- Survey of 1,493 executives and government officials

- Survey of 1,076 investors

- 33% Americas, 35% EMEA3 and 32% Asia

� We conducted secondary research and developed quantitative models

Scope Approach

Note: 1Buy side includes institutional and retail asset management inclusive of private banking, hedge funds and the end institutional investor (sovereign wealth funds, retirement plans, endowments & foundations) and individual investors, Sell side includes investment banking and capital markets, Processors include custodians, exchanges, ATSs and clearing firms; 2Primary research was conducted between April 1st, 2008 through October 30th, 2010, 85% of business leaders are Board or C-level, EVP or divisional head with the remainder Director, SVP or VP level; 3EMEA is Europe, Middle East, Africa

� Which forces will disrupt the industry landscape?

� What will clients pay for?

� How will the bases for competition change?

� What steps must firms take today to win?


CFA Institute

Introduction

11/21/20104



Introduction

Results

Appendix

Additional insights



Table of Contents

Table of contents

11/21/20105



Historically firms have benefited from pockets of opacity; returns of the past are over and firms must learn how to generate sustainable value

� Sophistication has outstripped our ability to handle it

� Together government and industry must balance stability and innovation

� Daily realities must deliver on brand promises

� To thrive, the industry must solve its identity crisis

Summary of Findings

The industry will consolidate and unbundle as it addresses the ‘unknowns’ of client, scale and risk.

Results

11/21/20106



Summary of findings

Sophistication has outstripped our ability to handle it

Together government and industry must balance stability and innovation

Daily realities must deliver on brand promises

To thrive, the industry must solve its identity crisis

Results

11/21/20107



Over the past decade, wealth was created in part by exploiting pockets of opacity

Note: 1SIVs are structured investment vehicles; 2Triparty agents are custodians typically assigned to hold repo securities overnightSource: http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html; BIS; IBM Institute for Business Value analysis

Shadow Banking Example: Assets Held by Financial Institutions, U.S., 2007

($ Trillions)

0

2

4

6

8

10

12

Traditional banking system Shadow banking system

Investment banks

Triparty agent2

SIVs and other conduits1

Hedge funds

Bank holding companies

Opacity exists when tangible or intangible items are difficult to see and analyze, thereby creating unintended consequences.

Results

0

100

200

300

400

500

600

700

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Derivatives Example: Global Over-the-Counter Derivatives, 1998-2007(Notional Amounts Outstanding, $ Trillions)

Interest rates

Foreign exchange

Hybrids Credit default Swaps

Equity-

linked

Commodities

CAGR 26% 13% 24% 108% 21% 41%

CAGR 41%

11/21/20108



Opacity-driven wealth is unsustainable

Note: 1Four prior instances of ‘the perfect storm’ which includes recessions characterized by simultaneous falls in asset prices, increase in consumer saving, and restrictions on bank lending due to a shortage of bank capital; four prior instances of this type of crash include: the Bankers’ Panic (1907), the Great Depression (1929-1939), Sweden (1992), Japan (1990-2000); 2ROE is for retail and wholesale banking, asset management and asset servicing, As of February 17th, 2009; Market cap figures are for retail and wholesale banking, asset management, asset servicing and insuranceSource: UBS; BIS; Standard and Poors; MSCI Barra; Thompson ONE Banker; IBM Institute for Business Value analysis

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2002 2003 2004 2005 2006 2007 2008

0%

5%

10%

15%

20%

25%

30%

Annualized Global Financial Sector Returns and Financial Sector as a

Percent of Total Market Cap, 2002-20082

(Left axis) Financial Services ROE

(Right axis) Financial Services Market Cap as a

Percent of Total

Results

Housing price induced

recessions

Recessions, 1890-2009(Measured in Number of Recessions1)

Credit / banking induced

recessions

Equity market induced

recessions

10

18 31

1

4

9

3

The current crisis is #5

“The damage caused by bubbles can be greatly increased where innovation leads to information loss.” – Merton Miller, Nobel Prize Winner in Economics

11/21/20109



0

20

40

60

80

100

120

1880-1913 1919-1939 1945-1971 1973-1997

Mature MarketsGrowth Markets

0%

-10

-8

-6

-4

-2

0

N/A N/A

Aggregate output loss

0

10

20

30

40

50

60

70

80

-5%

-10%

Frequency and Size of Crises, 1880-1997(Number of Crises and Output Loss in Mature and

Growth Markets across 139 Countries1)

Sophistication has unintended consequences; shocks are increasing in frequency and magnitude

Note: 1Output loss is calculated as the sum of the differences between actual GDP growth and the five year average preceding the crisis until growth returns to trendSource: Inside MBS & ABS; Fitch and S&P Ratings; European Securitization Forums; Crises now and then: What lessons from the last era of financial globalization? University of California and Rutgers University; IBM Institute for Business Value analysis

'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '060%

5%

10%

15%

20%

25%

30%

35%

40%

45% $3.0

$2.5

$1.5

$1.0

$.5

0

$2.0

Cross-border M&A as % of Total M&A

Collateralized debt obligation

Asset-backed securities

Mortgage-backed securities

Integration and Instrumentation, 1996-2006(Cross-Border M&A vs. Global ABS, MBS, CDO

Issuance $ Trillions, % of Total M&A Activity)

Results

11/21/201010



0

10

20

30

40

50

60

70

80

90

100

Systemic Risk Example: Percent of Countries Experiencing Financial Stress

(Sample of 17 Mature Market Countries1)

The industry and governments have been blind to the dark side ofsophistication

Note: 1Financial stress is measured based on an IMF-created country-by-country index which includes variables such as interbank spreads and equity and bond market performance; 2ERM is exchange rate mechanism; 3LTCM is Long Term Capital ManagementSource: IMF; Thompson ONE Banker; IBM Institute for Business Value analysis

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1994 1996 1998 2000 2002 2004 2006 2008

Asset and wealth managementInvestment bankingAsset servicingSector averageCommercial and retail banking

Global Return on Equity Volatility, Selected Financial Services Industries

1994-2008

Results

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%1980 20081985 1990 1995 2000

Nikkei/junk bond

collapse

Stock market

crash

Scandinavian banking crises

ERM2

crisis

LTCM3

collapse

11/21/201011



As a result, the industry is experiencing more painful risk assumption and risk mitigation cycles

0%

20%

40%

60%

80%

100%

1899 2005 2008

Industrials

Health care

Sector Composition of Market Capitalization, US and UK,

1899, 2005, 20092

Railroads

Iron, coal, steel

Utilities

Information technology

Energy

Consumer staples

Financial services

Consumer discretionary

Telecommunications

10%

22%

10%

Materials

Note: 1Leverage ratio = tangible assets/tangible equity, VaR = tangible assets*volatility/tangible equity; 2Market cap figures are for retail and wholesale banking, asset management, asset servicing and insurance and are as of February 17th, 2009Source: SNL Financial, Thompson ONE Banker; Yahoo Finance; Standard & Poors; IBM Institute for Business Value analysis

Global Financial Services Return on Equity, Value at Risk and Leverage Ratios,

1992-20081

0x

5x

10x

15x

20x

25x

30x

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0%

10%

20%

30%

40%

50%

60%

(Left axis) Leverage ratio

(Right axis) ROE

1992 1994 1996 1998 2000 2002 2004 2006 2008

(Right axis) VaR

Results

11/21/201012



Summary of findings





Results

11/21/201013



Today’s financial architecture must be reconstructed to reflect the increasingly sophisticated environment

Note: 1Question asked: What regulatory actions do you anticipate over the next five years, select top two (IBM / EIU survey); 2 Maxim is defined as rules of conduct; 3CSR is corporate social responsibilitySource: IBM / EIU Survey; The Yin Yang of Financial Disruption; IBM Institute for Business Value analysis

Cultural alignment /

Shared frameof reference

Balanced Incentives

and metrics

Global collabor-ation and

innovation

Transparency, systemic

intelli-gence

Leadershipin a new era of CSR3

Cohesive, streamlined

oversight

Mechanisms for protection, resolution, insurance

��

�

� �

�

New Maxims2 for Balancing Stability and Healthy Innovation

�

Anticipated Regulatory Response(Percentage of Survey Respondents1)

n=113

0% 5% 10% 15% 20% 25% 30% 35%

Transparency requirements

Capital / liquidity requirements

Global harmonization

Security

Retirement regulation

Conflicts of interest

Climate change

Other

Results

11/21/201014



Innovation gaps vs. near-term performance gaps1

To rebalance financial stability with healthy financial innovation, tensions must be managed in an uncertain environment

Note: 1Potential unintended consequences; 2Based on a survey of public and private sector executives, question asked: What are the top driving forces on the future of wholesale financial marketsSource: The Yin Yang of Financial Disruption; Primary interviews; World Economic Forum: “The future of the global financial system”; IBM Institute for Business Value analysis

Structural tensions must be managed:

Example tensions

Gvt. intervention Free markets

Tactical focus Strategic focus

Financial Stability

Healthy Innovation

Commoditization vs. unbridled opportunism1

Uncertainty of Driving Forces in Financial Services(Ranking Based on Percentage of Survey Respondents2)

Demographics

Income inequality

Data management innovation

Finance & risk innovation

Financial literacy

Societal attitudes to compensation

Compliance cost

Client needs

Corruption

Environmental (self)regulation

Global currencies(relative value)

Global wealth distribution

IT security

Transparency & investibility

Lender of last resort (access to)

Taxation

Savings rates

Global trade balancePrivatization

Geopolitical power

distribution

GDP growthEnergy innovation

Energy prices

Non-energy commodity prices

Protectionism

Climate change

Business standards

Fiscal policy

Water availability

Democratization

Regional core inflation

Extremism

Degree of uncertainty

Degree of importance

Critical Uncertainties

HighLow

EconomicLow

Hig

h

Political

Environmental

Technological

Social

Results

11/21/201015



The financial architecture must be co-created to mitigate unintended consequences of over-regulation

Source: IBM Institute for Business Value analysis

Policy Makers

Regulators Supervisors

FinancialInstitutions

Compliance

Laws &Rules

Surveillance &Monitoring

Standards

The financial architecture must be co-created by governments and financial institutions

End goal: Systemic health (vitality, soundness), risk (safety, stability)

Behaviors, issues, trends through the lens of regulation

Oversight1

2 Practices, enablers, constraints, limits

Behaviors, issues, trends through the lens of supervision

4

3

5

1

2 3

4

5

Results

11/21/201016



Summary of findings





Results

11/21/201017



Note: 1Question asked: In your opinion, In your opinion, what level of priority will your firm assign to the following items over the next five years, indexed results on a scale of 1-10 where 10=highly proficient; Question asked: In your opinion, how proficient is your firm at performing select activities, Rate on a scale of 1 to 6, where 1=We are weak compared to others and 6=We are best in classSource: IBM / CFA Institute Survey; IBM / EIU Survey; IBM Institute for Business Value analysis

2 3 4 5 6

To deliver on brand promises, firms must address the ‘unknowns’of clients, scale and risk

Importance vs. Proficiency of Capabilities(Percentage of Survey Respondents, Proficiency Index1)

Size of bubble represents size of gap between importance and proficiency among participants

Scale capabilities

Risk capabilities

Client capabilities

Provide quality relationship

management

Important

Highly Proficient

Highly Important Weak Proficiency

Understand client needs

Provide unbiased

quality advice

Manage systemic risk

Ability to eradicate

inefficiencies

Manage risk associated with new products / markets

Ability to implement / leverage new technologies

Manage risk across silos

Ability to form and manage successful strategic alliances

0

10

7

6

4

3

1

2

5

8

9

Results

11/21/201018



Firms must must address the unknown client by aligning interests

Provider Opinion: Providers offer products in the firm’s best interest

(Percentage of Survey Respondents1)

Americas

EMEA

AP

Note: 1Question asked: To what extent do you agree / disagree with the following statements about trust, Please rank on a scale of 1-6 where 1=strongly disagree and 6=strongly agree, Investment firms are likely to offer products & services in the investment firm’s own best interestIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Client Opinion: Providers offer products in the firm’s best interest


Trust Gap

0%10%20%30%40%50%60%70%

Strongly Agree

Neutral

Strongly Disagree

0% 10% 20% 30% 40% 50% 60% 70%

n = 762n = 711

Results

11/21/201019



0% 10% 20% 30% 40% 50% 60% 70% 0% 10% 20% 30% 40% 50% 60% 70%

Note: 1Question asked: How much would your clients be willing to pay over existing rates to ensure that you deliver on specific factors, Select 0%, 5%, 10%, 15% or more, don’t know; How much would you be willing to pay over existing rates to ensure that your provider delivers on specific factors, Select 0%, 5%, 10%, 15% or more, don’t knowIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Providers must overcome their product-focused mindset to deliver on what clients actually value

Provider Perceived Premiums (Percentage of Survey Respondents1)

Client Indicated Premiums (Percentage of Survey Respondents1)

Best-in-class offerings

Transparency

Reputation / integrity

Customization

Unbiased quality advice / client service excellence

n=398 n=754

Convenience

Modularity

One-stop-shop

Global footprint

CSR / green

15% Premium

10% Premium

5% Premium

Not willing to pay more

Unbiased quality advice / client service excellence

Transparency


Convenience

One-stop-shop


Modularity

Customization

Global footprint

CSR / green

Results

11/21/201020



To address scale squander and unnecessary costs, firms must balance capacity reduction with efficiency creation

20.57%28%

20.55%34%

20.10%24%

20.45%36%

Type II Cost

Reduction

Required as a %

of Base Cost

Historical Pre-

tax Net Profit

Margin

Note: 1Slow revenue growth is based on a base case scenario of 0.65% growth year-over-year from January 2009 through January 2010; 2Margins are based on an average pre-crisis margin for the period between 2005-2007 and are based on an industry average across investment banking, capital markets, wealth management, asset management and asset servicing for the largest five organizations by market share; 2Type II Costs are cost take-out strategies that create operational efficiency without reducing capacity. Type I costs include capacity reduction in the form of either headcount reductions or divestitures. Figures take into consideration headcount reductions that have already taken place from 2007 through February 20th, 2009Source: C2 Profit Map Model; IBM Institute for Business Value analysis

Assuming slow1 revenue growth through 2010, firms will have to reduce Type II Costs2 by 20% in order to

return to previous levels of profit margin

Investment banking / capital markets

Asset management

Asset servicing

Wealth management

Type II: Shift the Cost Curve Down

Tota

l C

ost

Capacity

Tota

l C

ost

Capacity

Type I: Move Down Cost Curve

Results

11/21/201021



0%

10%

20%

30%

40%

50%

60%

70%

Firms can achieve type two scale efficiencies through streamlining, sourcing and closing the business-to-IT gap

Efficiency / Streamlining Areas of Investment

(Percentage of Survey Respondents)

Outsourcing Appetite(Percentage of Executives Interviewed)

Level of Integration of IT into Business Strategy

(Percentage of Survey Respondents)

n=594

Fle

xib

le a

rch

itect

ure

/

co

mp

one

nt cap

abili

ties

0%

10%

20%

30%

40%

Op

tim

ized

reso

urc

es

Kn

ow

led

ge

sha

ring

Alli

an

ces

Go

vern

an

ce

Oth

er

Ce

ntr

aliz

ed

activi

ties

Div

ers

e m

gm

t. t

ea

m

Wage

arb

itra

ge

n=550

Interviews conducted between

1994-2007

0%

10%

20%

30%

40%

50%

60%

Interviews conducted between

2008-2009

n=450

Tra

vel /

tra

nsp

ort

atio

nP

ha

rma

Te

lecom

Me

dia

/ e

nte

rta

inm

en

t

Insu

rance

En

erg

y /

utilit

ies

Go

vern

me

nt

Ba

nki

ng

Ind

ustr

ial

Co

nsum

er

pro

du

cts

Ed

uca

tion

Re

tail

Ch

em

ical

He

althca

reF

inan

cia

l ma

rke

ts

De

fense

Ele

ctr

on

ics

Au

tom

otive


Results

11/21/201022



At the same time, firms must rebalance their portfolio of risks and returns to the increasingly sophisticated environment

0

- 2

- 4

- 6

- 8

Retail and Commercial

Banking

All Industries3Asset and Wealth Management

20%

15%

10%

5%

0%

Investment Banking

Global Return on Equity & Volatility, Select Industries, 1994-2008

Modified Sharpe Ratio2ROE Volatility of ROE1

MeanStandard Deviation

Standard Deviation

Normal Curve Distribution

is migrating to a

‘Fat Tail’Distribution

Traditional Bell Curve Risk Model and Fat Tail Risks


Results

11/21/201023



Ris

k

Pricing segments

Ris

k

Pricing segments

Firms must develop capabilities to profit from risk by re-segmenting clients and re-pricing products

Simplistic

Sophisticated

Pricing Approaches

0% 10% 20% 30% 40%

Client Segments Based on Behavior and Attitudes

(Percentage of Respondents1)

n = 950

“Make it easy for me"

Convenience Desirers

“I monitor prices and want the lowest

cost product / service"

Price-sensitive Analyzers

"I am informed and squeeze as much

value from my provider as possible"

Active Demanders

"I rely heavily on my provider and

outsource as much as possible"

Uninvolved Minimalists

"I require significant support"

Service Expectants

"I want to work with a provider that has minimal conflicts of interest"

Conflicts of Interest Avoiders

1

5

4

2

3

6

Note: 1Statistical clustering analysis based on the following questions: Will the following capabilities become increasingly / less important to you over the next five years, Please rate factors on ascale of 1-6 where 1=Becoming less important and 6=Becoming more important; How much would you be willing to pay over existing rates to ensure that your provider delivers on specific factors, Select 0%, 5%, 10%, 15% or more, don’t know; Which factors will evolve over the next five years to enable you to become more active and informed? Please rate the extent to which each of the following factors would enable you to become more active and informed on a scale of 1-6 where 1=Not at all and 6=To a great extent; To what extent do you think the financial services industry will evolve over the next five years to allow you to overcome the following barriers? Please rate the extent to which you will overcome the following barriers due to the evolution of the financial services industry on a scale of 1-6 where 1=Not at all and 6=To a great extentSource: IBV / CFA Institute Survey; IBM Institute for Business Value analysis

Example Ranking of Risk-adjusted

Profitability

Results

11/21/201024



Summary of findings





Results

11/21/201025



-80%

-75%

-70%

-65%

-60%

-55%

-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

-4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7%

Ten MonthMarket cap decline

average = 48%

Note: 1GDP is real GDP for 2009; Market cap based on top 5-20 financial services firms by country between April 2008-January 2009 Source: Reuters; Economist Country Forecast reports; EIU Macro Model; JPMC; IBV Institute for Business Value analysis

80% of firms have an ‘identity crisis’; This identity crisis was driven by wealth destruction…

Financial Services Market Capitalization Decline and GDP Growth by Region

(Projected GDP Growth vs. Market Cap Decline1)

Brazil

CanadaAustralia

China

CEE

France

India

Middle East

Germany

Japan

ASEAN

Bubble size represents equity and fixed income assets as of 2008

GDP growth average = .2%

10 Month Market Capitalization Decline

2009 GDP Growth / Contraction

RussiaS. Korea

Switzerland

US

UK

Example Firm Market Capitalization, June 2007 - January 2009

($ US billions, Rank Ordered by Loss as a Percent of Total)

June 2007 January 2009

SantanderCredit Suisse

Goldman Sachs

Citigroup

JP MorganHSBC

Morgan Stanley

RBS Deutsche Bank

Barclays

BNP Paribas UBS

Results

11/21/201026


© Copyright IBM Corporation 201011/21/201026

…and significant revenue pool restructuring

Estimated Global Revenues for Selected Activities, 2007-2012

Note: 1Transparency index is as of 2009 and is a 1-10 ranking where 1=highly opaque and 10=highly transparent, index is based on quantitative and qualitative factors for each activity categorized by extent of 1) complexity of product offered, 2) shareholder and investor communications, 3) operational transparency; 2Wealth management revenues are duplicative of underlying asset classes of long-only active asset management, passive asset management, hedge funds and private equity; 3OTC is over-the-counter, OTC and exchange traded derivative revenues are duplicative of agency, principal client and principal proprietary; 4Infrastructure is sell side processing and clearing; 5 Principal Client represents trading revenues in which a broker / dealer assumes principal risk on behalf of a client, Principal proprietary represent trading revenues in which a broker / dealer assumes principal risk on behalf of itself; 6Bubble sizes do not increase in the same proportion as revenue increasesSource: IBM Institute for Business Value Financial Model

0

2

4

6

8

10

12

-50% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 60%

OTC Derivatives3

Hedge funds: Underperformers2

Long-only Active2

Prime Brokerage

Private Equity

Hedge funds: Outperformers2

Wealth Management2

Passive2 ExchangeTraded Derivatives3

Asset Servicing

Year 2012 Revenues

Year 2007 Revenues

Transparency Index: 2009 Industry Average = 5.41

Transparency Index1, 10 = highly transparent

Revenue CAGR 2009-2012

Weighted Average Revenue CAGR 2009-2012: Industry Average = -0.17%

Exchanges

Infrastructure4

Securitization

Key6

Agency

Principal Proprietary5

Principal Client5

$150 Bn$20 Bn

Results

11/21/201027



0 2 4 6 8 10

Universal banks

As the industry solves its identity crisis, firms that focus will come out ahead

Industry Perception: Business Model Leaders(Percentage of Respondents1)

Industry Reality: Leader vs. Laggard Index2

Note: 1Questions asked: Which business model type is best positioned for the future as measured by consistently meeting client needs, Select top two; 2Statistical index analysis based on equally weighted factors: 1) historical performance from 1994-2008 as measured by profit and revenue growth, 2) volatility of ROE, 3) extent of disconnects between provider and client responsesSource: IBV / CFA Institute Survey; IBM Institute for Business Value analysis

2009

2007

2005

Asset manager / distributor

Boutique investment banks

Niche asset managers

Niche distributor

Alternative investment firms

Information vendors

Asset manager / custodian

Focused universal banks

Regional exchanges n = 803

Global broker / dealer

Asset manager / custodian

Boutique investment bank

Institutional-orientedasset manager

Stock exchanges

Retail-oriented asset manager

Regional broker-dealer

Universal banks

Independent financial advisors / consultants

Results

Alternative investment fundn = 801

0% 5% 10% 15% 20% 25% 30%

11/21/201028



Ultimately, there will be further rationalization as the industry unbundles; ‘beta transactors’ will serve a utility function

Industry Unbundling, 2012(Estimated Margin and Earnings Volatility2)

Note: 1Asset servicing is based on share of assets under custody, exchanges is share of volume, investment banking is share of revenue, wealth and asset management represent share of global assets under management; 2Estimated margins were derived from a scenario based forecasting model, volatility is historical ROE volatility from 1994-2008; 3 The majority of financial markets firms will concentrate on becoming “beta transactors”, i.e., utilities that provide the infrastructure required to facilitate transactions in the same way that water companies provide the reservoirs, purification processes and pipes required to deliver clean water; A smaller number of firms will concentrate on providing advice, i.e., wealth management or mergers and acquisitions advice, and a handful of “alpha seekers”, typically private equity firms, hedge funds and boutique investment houses will focus on generating high returns from high-risk investmentsSource: C2 Profit Map Model; IBM Institute for Business Value analysis

0%

20%

40%

60%

80%

100%

1994

2008

1994

2008

1994

2008

1994

2007

1994

2007

Asset servicing

Exchanges Investment banking

Wealth Mgmt.

Global Levels of Concentration, 1994, 2004, 2008

(Market Share of Largest Firms1)

Asset Mgmt.

0%

2%

4%

6%

8%

10%

0% 10% 20% 30% 40% 50%

Alpha seekers Size of bubble represents estimated revenues, year 2012

VolatilityIndustry Average = 3.8% Margin: Weighted

Industry Average = 25.0%

Estimated Margin, 2012

Advisors

Volatility of ROE, 1994-2006

Beta transactors3

Results

Top 10

Next 15

Rest

11/21/201029



The industry will strengthen as it learns how to deliver sustainablereturns

� Success was derived from opacity and lack of stringent regulation –

these days are over

� The industry will generate lower but more sustainable returns

� Now is the time to deliver on brand promises and specialize

Final Thoughts

Results

11/21/201030



Introduction

Results

Appendix

Additional insights



Table of Contents

Table of contents

11/21/201031



0% 20% 40% 60% 80% 100%

Cost of borrowing

Business confidence

Availability of bank credit

Availability of cap. mkts. debt

Share price

Ability to increase ROE

Ability to execute strategy

Capital expenditure plans

Increasing value of assets

Strengthening balance sheet

Ability to fund pensions

Adverse Impact of Credit Crisis (Percentage of Survey Respondents1)

Very significant Not significant

n=373

Government backing and oversight will be required to restore confidence and address longer-term structural tensions

Note: 1Question asked: What regulatory actions to you anticipate over the next five years, select top two (IBM / EIU survey)Source: IBM / EIU Survey; Primary interviews; IBM Institute for Business Value analysis

Structural tensions must be managed: Example tensions

Government intervention Free markets

Credit under-extension Credit over-extension

Product focus Client focus

Tactical focus Strategic focus

Financial Stability

Healthy Innovation

Potential unintended consequences:

Commoditization vs. unbridled opportunism

Economic contraction vs. asset bubbles

Innovation gaps vs. near-term performance gaps

Short-sightedness vs. innovation myopia

Appendix

11/21/201032



Given recent consolidation, regulators fear banks not only becoming too big to fail, but too big to save…

0

2 4 6 8 10 12 14

SwitzerlandTop 2: 82%

USTop 5: 62%

UKTop 5 Banks % of Total Assets: 92%

JapanTop 3: 51%

0

100 200 300 400 500 600 700 800 900 1000%

Bank Asset % of GDP

Top 400 Bank Assets

Concentration of Bank Assets Vs. Bank Assets as a Percentage of GDP, 2007

(US$ Trillions, Percent)

US Example: Shotgun Consolidation

(Bank Assets as of Oct 2008)

Extinct

Oct, 2008

June, 2008 (Pre-industry morphing)

BoA

Citi

JP

MC GS

MS

Wells

UB

S

SunT

r

ML

Wach

Leh

BearS

t

WA

MU

0

500

1000

1500

2000

2500

3000

Source: The Banker Top 1000 World Banks, July, 2007; Economic Intelligence Unit, Reuters, Federal Reserve; Quarterly reports; Institute for Business Value

• Asset Transfer of $2.7tr• $690bn evaporated with

bankruptcy of Lehman

Appendix

11/21/201033



…particularly, as the scale squander and complexity of running ever bigger banks has taken hold

Source: FDIC, Thomson Financial/Sheshunoff Information Services, The Banker Top 400 Banks, Reuters IBM / EIU Survey; IBM Institute for Business Value analysis

Financial Services Efficiency Ratios, 2003 - 2007

($ Trillions, Total FDIC Bank Assets Reported)

52%

54%

56%

58%

60%

62%

2003 2004 2005 2006 2007

Top 25 Banks’ Share of the Top 100 Global Banks’ Assets

Percent, Trendline

40

50

60

70

1996 1998 2000 2002 2004 2006 2008 (Q2)

Appendix

11/21/201034



The industry has been blind to signs of industry maturity

Pre-crisis Global Return on Equity for Selected Industries, Trendlines, 1994-20061

Note: 1Pre-crisis is based on historical average ROE for the period between 1994-2006Source: Thompson ONE Banker; IBM Institute for Business Value analysis

0%

15%

20%

25%

30%

1994 2000 2006

US Bulge Bracket Firms (pre-extinction)

Integrated Custodian /Asset Managers

Asset Management Specialists

All Industries

90% of executives interviewed believe the returns of the past are over.

Appendix

11/21/201035



The industry has also been blind to risk assumption and risk mitigation cycles that are difficult to predict and protect against

Risk Cyclicality: Leverage Ratio vs. Value at Risk for Commercial and Investment Banks, 1992-2007

0x

5x

10x

15x

20x

25x

30x

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

0%

10%

20%

30%

40%

50%

60%

(Left axis) Leverage ratio

(Right axis) VaR

Note: 1Leverage ratio=tangible assets/tangible equity; 2 VaR=tangible assets*volatility/tangible equitySource: Ubide 2008 http://www.rbwf.org/2008/london/Ubide.pdf; IBM Institute for Business Value analysis

Example: Value at Risk Imperfections

1992 1994 1996 1998 2000 2002 2004 2006 2008

� Underlying position-taking increased as volatility was historically low – masking true risk

� Rising asset prices and historically low volatility allowed banks to increase their leverage while maintaining roughly stable levels of Value at Risk

� This allowed banks to profit from origination and sale of complex credit derivatives products that generated high fees but that, when banks kept a portion of it, generated a covert high exposure to tail risks

� This exposure to tail risk was not easily captured by standard VaR models because of the novelty of these products and the lack of time series to stress test portfolios, and thus leverage increased

Appendix

11/21/201036



There are, however, opportunities for growth; most executives view globalization as an opportunity

Note: 1Executives asked: Does your firm pursue a global business strategy 2What benefit does your firm derive from being a global financial services provider now and in five year’s timeSource: IBM / EIU Survey; IBM Institute for Business Value analysis

Globalization as an Opportunity or Threat


Threat 5%

Opportunity95%

n=146

Globalization Benefits(Percentage of Survey Respondents2)

Product/ service

innovations

0%

10%

20%

30%

40%

50%

60%

70%

80%

Scale efficiencies

No benefitBroader client base

More liquid

markets

Sources of talent

Current benefits Expected benefits n=325

Appendix

86% of executives believe that in five years’time, forces of globalization will be a more important factor in their firm strategy.

11/21/201037



As financial capital disburses, the opportunity will extend beyond BRIC

Geographic Financial Capital Dispersion, 1995-2025(Growth in GDP per Capita vs. Growth in Sophistication)

Note: 1Sophistication is measured on a scale of 1-5 between the years 1995 to 2025, where 5=most and 1=least, sophistication. Factors include interest rate spread, market distortions, open-ness to foreign investment, open-ness to product creation, use of indirect instruments, access to financing, monetary stability, regulation quality, liberalization, market capitalization, refer to IBM / EIU Methodology Paper. Graphic includes top 21 countries of total 35 countries in analysisSource: IBM / EIU Macro Model; IBM Institute for Business Value analysis

Prospect markets are closing the gap

� GDP growth and growth in sophistication are leading indicators for growth in financial assets

� Although veteran markets such as the US and Japan dominate in asset size, China, South Korea, India and Russia are quickly closing the gap

� China presents the largest opportunity; in 1995 China’s assets are dwarfed by the size of US assets; by 2025 China’s assets will increase to one third the size of the US

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

0% 2% 4% 6% 8% 10% 12% 14%

Russia

India

GDP per Capita Growth

Sophistication Index Growth

Circle size represents size of equity and debt assets in 2025

China

S. Korea, Mexico

.59%

Mean Sophistication Increase

6%

Mean GDP / Capita Growth

Brazil

US, UK, Canada, Netherlands

France, Germany, Italy

TaiwanJapan

Ukraine

IranPoland

IrelandTurkey

IndonesiaGreece

Chile

Spain

Appendix

11/21/201038



Financial System Evolution, 2005-2025(Investable Assets $ Trillions, Share and CAGR percentages)

Additional growth will be driven by a shift from deposits to securities as economies mature

Note: 1EU does not include the UKSource: IBM / EIU Macro Model; IBM Institute for Business Value analysis

� Although Japan is the second largest economy in the world, securities penetration is behind Russia

� The EU and China are closing the securities gap with the US

� US, EU and UK equities cultures are evident based on the ratio of equities to fixed income

Culture will influence the pace of adoption

0

50

100

150

200

250

300

350

400

450

500

2005 2025 2005 2025 2005 2025 2005 2025 2005 2025 2005 2025 2005 2025 2005 2025

Japan Brazil EU1China Russia India US

38% 46% 47% 51% 53% 55%

17% 6% 18% 17% 11% 8% 8%

11% 4% 14% 12% 8% 5% 7%

Deposits dominate Securities dominate

UK

48%

8%

4%

Securities Share 2025 60%

Securities CAGR

DepositsCAGR

EquitiesCurrency/Deposits Fixed Income

Appendix

11/21/201039



Geographic Human Capital Dispersion, 1950-2025

Leading organizations will recognize the importance of human capital dispersion across geographies

Note: 1Physics and math are used as proxies for financial markets talent; 2Number of physics and math awards are measures of high school students' performance, compiled based on number of gold medals received in the International Physics and Math Olympiads; 3Higher education status in each country is measured by the number of top 500 universities within each country, refer to http://ed.sjtu.edu.cn/rank/2005/ARWU2005Methodology.htm for methodology Source: International Physics and Math Olympiad websites; University of Maryland Research, http://www.cs.umd.edu/~changhu/838s-ipho/hw2.html; IBM Institute for Business Value analysis

Example Talent Pools, 2004 - 2006(Physics and Math Awards1 vs. Share of Universities)

� Between 1950 and 2007, developed nations’ population share shrunk from 33% to 20%

� In 2005, the total qualified4 talent pool consisted of 95 million professionals. By 2015, it is expected to total more than 176 million.

� Veteran market contribution to the financial markets qualified talent pool is expected to increase by 22% between 2005 and 2025, while the prospect market contribution triples over that same time period

� By 2017, we anticipate that prospect markets will be providing over half the industry’s talent.

0%

5%

10%

15%

20%

25%

30%

35%

0 5 10 15 20 25 30 35

RussiaIndia

Share of Universities within top 5003

Total Number of Physics and Math Awards2

China

Italy 5%

Mean University Share

10

Mean Awards

US

Canada

UKJapan

Taiwan

Germany

PolandS. Korea

Circle size represents population

TurkeyAustralia

Appendix

11/21/201040



In addition to talent, basic infrastructure reform will be required

Comparative Population and Infrastructure Metrics Across Key Markets, 2006

Note: 12005 data used where 2006 data not available; 2e-Readiness ranking is a weighted collection of nearly 100 criteria assessing the technological development of a country’s information and communications systemsSource: BusinessWeek, March 19, 2007; IBM / EIU e-Readiness survey; IBM Institute for Business Value analysis

National Expressways

MajorAirports

ElectricityProduction

e-ReadinessRanking

India

China

United States

Thousands of Miles

4

251

47 189

56

17

Billions of KWH

IBM Survey Factors2

4,000

2,5001

652

44

9

Population

Billions

.3

1.3

1.1

Number of Airports

Appendix

11/21/201041



Supply

Perceived Market Center Dominance, 2025


Note: 1Turnover velocity is calculated as the month’s share turnover x 12 / month-end market capitalization; 2Executives asked: Which market centers, if any, will be as dominant or more dominant than New York, London and Tokyo by year 2025; 3EMEA is Europe, Middle East, Africa

Source: World Federation of Exchanges, Focus; BIS; IBM Institute for Business Value analysis

Americas Asia PacificEMEA

Market infrastructure capital may also disperse as market centers consolidate and mature

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Americas EMEA Asia Pacific

Turnover Velocity, 1995-2005(Trading Volume to Market Capitalization1)

0%

5%

10%

15%

20%

China Mumbai Hong Kong

Dubai None

Deal value of Shenzhen, Shanghai, and Hong Kong, amounted to $53bn. in 2006 which surpassed UK at $48 bn. and the US at $46 bn.

EMEA3

surpassed Americas for the first time in 2005

Asia is starting to close the

gap

Appendix

11/21/201042



Percent of providers understand what clients value

Ultimately, to move from crisis to health to wealth, the industry must ensure daily realities deliver on brand promises

Brand Promise vs. Interaction Reality

Brand Promises

Brand Promises

Interaction Reality

Interaction Reality

Agility

Stability

Client-centricity

Complexity

Volatility

Firm-centricityBrand promise target audiences include: clients, shareholders, employees and governments.

21%

67%

Positive 40% to negative 10%

Range of Return on Equity for selected financial markets companies

Percent of organizations that rank themselves as ‘moderate’ to ‘poor’ in

business and technology agility

Example Areas of Weakness

Appendix

11/21/201043



Firms must extend beyond Type I savings to build an efficient platform for growth

Impact and Timing of Cost Savings Programs

Timing of Benefits Realization

Long-term Impact

(Sa

vin

gs a

s %

of

spe

nd

)

Low (5-10%)

Long(> 12 mos.)

Short(3-6 mos.)

Medium (10-25%)

High (>25%)

Medium(6-12 mos.)

Type 1 Quick Hits

� Staff Reductions

� Management De-layering

� Activity/Service

Rationalization

� Project Rationalization

Shared Services Optimization

Front-to-Back Office Integration

� Collections & Recovery

� Transaction Processing / Core

Banking Systems Transformation

� Lending Process

� Account Opening/Client Data

Management

� Enterprise Data Management

� Enterprise Content Management

� Call Center

� Human Resources

� Finance

IT Optimization� Application Portfolio

Rationalization

� Application Development &

Maintenance

� IT Resource Optimization

Type I Savings: Initiatives that drive near-term savings via reduced capacity

Type II Savings: Initiatives that drive longer-term savings & sustained business growth

Appendix

11/21/201044



Note: 1Question asked: What keeps you awake at night (open ended within interviews); 2Question asked: Will industry returns as measured by ROE be higher, lower or remain the same post-crisis Source: Primary interviews; IBM / CFA Institute Survey; IBM Institute for Business Value analysis

To thrive, the industry must deliver on brand promises through business model innovation; firms currently have an identity crisis

What Keeps you Awake at Night?(Percentage of Executives Interviewed1)

Restoring balance sheet health

Business model uncertainty

n=100

90% of executives interviewed believe the returns of the past are over, while another 85% believe profit pools will shift significantly.2

Strategic Initiatives(Percentage of Survey Responses2)

n=550

0% 20% 40% 60% 80% 100%

Business model innovation

Knowledge of client needs

Risk management

Quality relationship mgmt.

Scale efficiencies

Product innovation

Quality advice

Business agility

Superior execution

Penetrate new markets

Ability to execute

IT agility

Alliances

Leverage new technologies

Appendix

11/21/201045



Most specialized organizations have outperformed universal banksfrom a growth standpoint

-35%

-25%

-15%

-5%

5%

15%

25%

35%

45%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55%

% Revenue Growth

% Operating Margin Growth/

Compression

Operating Margin CAGR vs. Revenue CAGR, 2003-2008

Distributors

Universal Banks (CB)

Source: IBV Profit Map Model; Company reports; IBM Institute for Business Value analysis

Universal Banks (PC)

Integrated

Capital Market Firms

Hybrid Mftrs & ProcessorsIntegratedMonolines

Niche ManufacturersExchanges

Size of bubble represents average revenue size from 2003-2008

Appendix

11/21/201046



Specialized organizations have also outperformed on a relative operating margin basis

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

0% 5% 11% 16% 21% 26% 32% 37% 42% 47% 53%

% Average Operating Margin

% Revenue Growth

Average Operating Margin vs. Revenue CAGR, 2003-2008

Distributors

Universal Banks (CB)

Universal Banks (PC)

IntegratedCapital Market

Firms

IntegratedMonolines

Niche ManufacturersExchanges

Size of bubble represents average revenue size from 2003-2008

Appendix

Source: IBV Profit Map Model; Company reports; IBM Institute for Business Value analysis

11/21/201047



0% 10% 20% 30% 40% 50%

Americas

EMEA

AP

n=573

Note: 1Question asked: Over the next ten years, where do you believe decoupling will occur across the financial markets value chain, Please select all that applyIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Anticipated Industry Unbundling(Percentage of Survey Respondents, Rank Ordered by Total1)

Wealth management & investment banking

Money management & advice provision

Insurance firms outsourcing asset management

Discount brokerage and wealth management

Risk management no longer conducted in-house

Alpha providers and beta providers

Agency trading and principal trading

Money management and middle-office processing

Back-office processing no longer conducted in-house

Exchanges and clearing

M&A advisory from investment banks

Prime brokerage services

None

Only 7% indicated ‘none’

Insurance firms & asset management

Discount brokerage & wealth management

Alpha providers & beta providers

Agency trading & principal trading

Universal banking business model unbundling

Ultimately, the industry will unbundle; winners will specialize

Appendix

11/21/201048



Introduction

Results

Appendix

Additional insights



Table of Contents

Table of contents

11/21/201049



Source: BIS Triennial Survey, 2004, 2007; IBM Institute for Business Value analysis

Over the counter derivatives market has seen impressive growth of 39% since 2004 on a compounded basis

Appendix

OTC Derivatives Notional Amounts Outstanding, Year End, 2004-2007($ US Billions)

$0

$100

$200

$300

$400

$500

$600

$700

2004 2005 2006 2007

CAGR 39%

11/21/201050



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007

Source: BIS Triennial Survey, 2004, 2007; IBM Institute for Business Value analysis

Historically, the over-the-counter market has seen an expansion in new product offerings; however interest rate contracts still dominate

Appendix

OTC Derivatives Market Breakdown by Product, 2004-2007

Others

Equity Linked

Commodity Contracts

FX Contracts

Credit Default Swaps

Interest Rate Contracts

11/21/201051



Total bond, equity and money market volumes have grown steadily at 9%; money markets command a sizeable 59% share of the total market

Appendix

Annual Turnover of Bond, Equity and Money Markets, 2001-2007($ US Billions)

Money Market

Equity Market

Bond Market

$0

$50

$100

$150

$200

$250

$300

$350

$400

2001 2002 2003 2004 2005 2006 2007

(18%)

(26%)

(57%)

(Figures in brackets represent the % share for the year 2007)

CAGR 9%

Source: World Federation of Exchanges and IBM Institute of Business Value Analysis.

11/21/201052



Global assets under management held a steady growth rate of 9%, 2002 being an exception year

Appendix

Global Assets Under Management($ US Billions)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2001 2002 2003 2004 2005 2006 2007

CAGR 8.7%

Source: 2008 Investment Company Factbook, ICI and 2007 IFS Global Fund Management Report.

11/21/201053



Conventional fund management assets (pension, insurance and mutual funds) dominate

Global Assets Under Management, 2008($ US Trillions)

Source: CBS Sovereign Wealth Funds Report, 2009

Appendix

$0 $5 $10 $15 $20 $25 $30

Private equity

Hedge funds

Sovereign wealth funds

Insurance funds

Mutual Funds

Pension funds

11/21/201054



(18%)

(20%)

(24%)

(14%)

(14%)

(9%)

Direct equity and cash represent the largest sources of revenuesfor wealth managers

Global Wealth Management Revenue Contribution by Asset Class, 2007

Source: Scorpio Partnership, Private Banking Benchmark 2008; IBM Institute for Business Value analysis

Cash

Fixed Income

Third Party Funds

Alternative Assets

In-House Funds

Direct Equity

11/21/201055



Note: 1Extrapolated from a benchmark list of Wealth ManagersSource: Scorpio Partnership, Private Banking Benchmark 2008; IBM Institute for Business Value analysis

Global wealth management assets under management are concentrated in North America and Europe

North America

Europe

Asia - Pacific

Middle East and Africa

Latin America

Appendix

(42%)

(36%)

(13%)

(5%)(4%)

Global Wealth Management Geographic Breakdown of Assets under Management, 20071

11/21/201056



Note: 1Extrapolated from a benchmark list of Wealth ManagersSource: Oliver Wyman, The Future of Private Banking 2008; IBM Institute for Business Value analysis.

Fixed income and cash dominate wealth management asset class allocation

Fixed Income

Cash / Deposits

Real Estate

Equities

Alternate Investments

Appendix

(14%)

(17%)

(27%)

(9%)

Global Wealth Management Allocation of Financial Assets by Asset Class, 20071

(13%)

11/21/201057



Source: Oliver Wyman, The Future of Private Banking, 2008; IBM Institute for Business Value analysis

In aggregate, commission and fee based models outperformed othermodels; Independent financial advisors have the highest percentage of revenues from fees

Fee Based

Commission and Fee Based

Commission Based

Appendix

Revenue Sources by Advisor, 2005-2006

Industry Bank Broker -Dealer

National Full Service

Broker-Dealer

Independent Financial Advisors

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2005 2006 2005 2006 2005 2006

11/21/201058



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007

Passive funds’ share of global assets under management have increased dramatically

Appendix

Global Assets Under Management by Asset Class, 2001-2007

Passive Funds

Non-Performing Hedge Funds

Performing Hedge Funds

Private Equity

Long Active

Source: ICI Factbook, Barclays Global Hedgesource Database and IBM Institute of Business Value Analysis.

11/21/201059



Long active and passive funds have suffered the greatest fee compression of 2.3% and 0.4% respectively

Appendix

Total Fees Charged by Asset Category, 2001-2007(Basis points)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2001 2002 2003 2004 2005 2006 2007

Private Equity (CAGR 3.2%)

Hedge Funds (CAGR 1.2%)

Active Funds (CAGR -2.3%)

Passive Funds (CAGR -0.3%)

Source: ICI Factbook, Barclays Global Hedgesource Database and IBM Institute of Business Value Analysis

11/21/201060



Total central bank reserves were $7 trillion with BRIC region commanding the largest share; concentrated mainly in China

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

Middle East

Other Europe

Rest of World

Asia Pacific

G7

BRIC

Concentrated in China

Central Bank Assets Under Management, 2008($ US Billions)

Note: 1BRIC – Brazil, Russia, India, ChinaSource: European Institute, SWF Institute, Bloomberg, OECD and Oliver Wyman

1

Appendix

11/21/201061



Sovereign wealth funds assets totaled $3.2 trillion; concentrated mainly in United Arab Emirates

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600

G7

Rest of the World

Other Europe

BRIC

Asia Pacific

Middle East

Concentrated in United Arab Emirates

Sovereign Wealth Funds Assets Under Management, 2008($ US Billions)

Source: European Institute Sovereign Wealth Fund Survey, 2008

Appendix

11/21/201062



Pension fund assets totaled $3.1 trillion; concentrated mainly in G7 region

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400

Middle East

BRIC

Other Europe

Asia Pacific

Rest of the World

G7

Concentrated in Japan

Pension Fund Assets Under Management, 2008($ US Billions)


Appendix

11/21/201063



In terms of total deal value, first quarter 2008 was dominated by North America and Asia Pacific whereas second quarter was dominated byEurope / Middle East and Africa

Sovereign Wealth Funds Deals by Target Region, 2008(Percentage, $ US Billions)


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q2008 2Q2008

Rest of the World

Middle East and Africa

Asia Pacific

Europe

North America

($58 billion) ($26 billion)

(Figures in brackets represent total deal value of all the regions combined)

41%

19%

40%31%

8%

43%

17%

Appendix

11/21/201064



Sovereign wealth funds are forecasted to allocate a greater share to fixed income assets

Sovereign Wealth Funds Asset Allocation, 2007 and 2012F(Percentage)


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2012F

Equity

Other Alternative

Real Estate

Private Equity

Cash

Fixed Income32%

27%

20%

15%

38%

25%

12%

16%

4%

1%

5%5%

Appendix

11/21/201065



Financial sector captures the lion’s share of sovereign wealth funds’investments to date

Sovereign Wealth Fund Investment by Sector1(Percent of Share)

(7%)

(9%)

(62%)

Note: 1Percent share of cross-border deals totaling $187bn between 1995 and July 2008Source: European Institute Sovereign Wealth Fund Survey, 2008

(6%)

(5%)

(11%)

Finance

Real estate

Energy

Services

Technology

Others

Appendix

11/21/201066



Sovereign wealth funds have placed more emphasis recently on injecting liquidity and helping to revive their local economies

$0 $5 $10 $15 $20 $25

Kaupthing

Chrysler Tower

Bear Stearns

Canadian Imperial Bank

Barclays

Morgan Stanley

UBS

Merrill Lynch

Citigroup

Subprime Capital Infusions from Sovereign Wealth Funds, 2008($ US billions)


(13%)

(23%)

(12%)

(10%)

(5.2%)

(11%)

(6%)

(n/a)

(5%)

(Figures in brackets represent % stake acquired.)

Appendix

11/21/201067



Two thirds of the top forty sovereign wealth funds have been established prior to 2000; many of the largest sovereign wealth funds have existed for at least a decade

Inception Year of Top 40 Sovereign Wealth Funds(Percent of Share)


2000-2008

Pre-1990

1990-1999

(34%)

(21%)

(45%)

Appendix

11/21/201068



Largest sovereign wealth funds, 2008


3,900Total

168Others

Commodity1976US29Alaska Permanent Fund

Non-commodity2005South Korea30Korea Investment Corp.

Commodity1983Brunei30Brunei Investment Agency

Commodity2000Kazakhstan38Kazakhstan National Fund

Non-commodity2004Australia44Australian Future Fund

Commodity2000Algeria47Revenue Regulation Fund

Commodity2006Libya50Libyan Investment Authority

Commodity2003Qatar60Qatar Investment Authority

Non-commodity2000China74National Social Security Fund

Commodity2006UAE82Investment Corp. of Dubai

Non-commodity1974Singapore134Temasek Holdings

Non-commodity1998China - HK173Hong Kong Monetary Authority Invest. Portfolio

Non-commodity2007China200China Investment Corp.

Commodity2008Russia225National Welfare Fund

Commodity1953Kuwait265Kuwait Investment Authority

Commodity1990Norway301Government Pension Fund of Norway

Non-commodityn/aChina312SAFE Investment Company

Non-commodity1981Singapore330Government of Singapore Investment Corp.

Commodityn/aSaudi Arabia433SAMA Foreign Holdings

Commodity1976UAE875Abu Dhabi Investment Council

SourceInception yearCountryAUM ($bn)Sovereign Wealth Fund

Appendix

11/21/201069



The use of external managers is expected to rise

Forecasted Use of External Managers, External AUM, 2008(Percentage)

Central Bank

Sovereign Wealth Fund

Sovereign Pension Fund0%

20%

40%

60%

80%

100%

120%

2008E 2010F 2013F


Appendix

11/21/201070



Investment performance is said to be the most important attribute of an effective manager for central bank, pension and sovereign funds

Importance of Services from Managers1, 2008

0 1 2 3 4 5 6 7 8 9

Local presence

Access to specific

markets

Sales coverage

Portfolio-customised

funds

Client confidentiality

Management fees

Staff training and

education

Investment performance

Note: 1Rated on a scale of 1-10, 1=least desired, 10=most desiredSource: European Institute Sovereign Wealth Fund Survey, 2008

Appendix

11/21/201071



Introduction

Results

Appendix

Additional insights



Table of Contents

Table of contents

11/21/201072



About CFA Institute

� CFA Institute is the global, not-for-profit association of investment

professionals with a mission of leading the investment profession globally

by setting the highest standards of ethics, education, and professional

excellence.

� CFA Institute administers the Chartered Financial Analyst® (CFA®) and

Certificate in Investment Performance Measurement (CIPM®) programs,

promotes the highest ethical standards, and offers a range of educational

opportunities online and around the world.

� CFA Institute has more than 100,000 members in 134 countries and

territories, including more than 86,800 CFA charterholders. CFA Institute

has offices in Charlottesville, VA, USA; New York, NY, USA; London, UK;

and Hong Kong.

Appendix

11/21/201073



About CFA Institute survey results

� A representative sample of 29,969 CFA Institute members were invited to

participate in the online survey

� Half of the sample was invited to participate in a “provider” survey and the

other half a “client” survey

� The surveys ran concurrently, from 10 September-24 September, 2008

� In total, 2,614 members responded to the survey

Appendix

11/21/201074



0% 10% 20% 30% 40%

Central banks

Endow ments

Private equity

Foundations

Sovereign w ealth

Hedge funds

Defined benefit plans

Defined contribution plans

Traditional asset managers

Financial intermediaries

0% 10% 20% 30% 40%

Central banks

Sovereign w ealth

Private equity

Endow ments

Hedge funds

Foundations

Defined benefit plans

Defined contribution plans

Traditional asset managers

Financial intermediaries

Current Over the Next Five Years

n=755 n=751

Note: 1Question asked: Which institutional clients are the most important to your firm as measured by profitability, select top three Source: IBM / CFA Institute Survey; IBM Institute for Business Value analysis

Most Important Institutional Clients(Percentage of Survey Respondents, Rank Ordered by Total)1

As the industry unbundles, the most important institutional ‘client’is expected to be financial intermediaries

Americas

EMEA

AP

Appendix

11/21/201075



0% 10% 20% 30% 40% 50% 60%

Developing markets-Underserved low -

income clients

Mature markets-Underserved low -income

clients

Mature markets-ages 15-30

Developing markets-ages 15-30

Developing markets-age 65+




Developing markets-HNW/ ultra HNW

Mature markets-age 65+

Mature markets-HNW/ ultra HNW


0% 10% 20% 30% 40% 50% 60%

Developing markets-Underserved low -

income clients

Mature markets-Underserved low -income

clients



Developing markets-age 65+




Developing markets-HNW/ ultra HNW

Mature markets-age 65+

Mature markets-HNW/ ultra HNW


n=392 n=391

Note: 1Question asked: Which individual clients are the most important to your firm as measured by profitability, select top three Source: IBM / CFA Institute Survey; IBM Institute for Business Value analysis

Most Important Individual Clients(Percentage of Survey Respondents, Rank Ordered by Total)1

The most important individual client segment is expected to be the baby boomer population

Current Over the Next Five Years

Americas

EMEA

AP

Appendix

11/21/201076



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Providers believe information access and regulatory changes willenable clients to become more empowered

n=398

Appendix

Access to financial information

Regulation that creates transparency

Ability to transact without

an intermediary

Greater cultural openness

Access to research tools

Mergers & acquisitions of

providers

Moderate extent No / small extentGreat extent

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Note: 1Question asked: Which factors will evolve to enable your clients (institutional and / or individual) to become more active and informed over the next five years, Please rate the extent to which each of the following factors would enable your clients to become more active and informed on a scale of 1-6 where 1=Not at all and 6=To a great extentSource: IBM / CFA Institute Survey; IBM Institute for Business Value analysis

Provider Perception: Extent to which Clients are Becoming more Active and Informed

(Percentage of Survey Respondents, Rank Ordered by Total)1

11/21/201077



Note: 1Question asked: Which factors will evolve to enable you to become more active and informed over the next five years, Please rate the extent to which each of the following factors would enable you to become more active and informed on a scale of 1-6 where 1=Not at all and 6=To a great extentSource: IBM / CFA Institute Survey; IBM Institute for Business Value analysis

However, clients believe research tools are the most important enabler

Access to research tools

Access to financial information

Regulation that creates

transparency



providers

n=756

Client Perception: Extent to which I amBecoming more Active and Informed


Appendix

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Transact w/o intermediary

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Moderate extent No / small extentGreat extent

11/21/201078



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Note: 1Question asked: To what extent do you think the industry will evolve over the next five years to allow your clients to overcome the following barriers, Please rate the extent to which the following barriers will be overcome by your clients due to the evolution of the financial services industry on a scale of 1-6 where 1=Not at all and 6=To a great extentIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Providers believe the largest empowerment barriers, namely, technology adoption and information asymmetry, will be overcome

Provider Perception: Extent to which Clients will break down Barriers Toward Becoming more Active and Informed(Percentage of Survey Respondents, Rank Ordered by Total)1

Weak technology adoption

Information asymmetry

Cultural bias

Risk aversion

Switching cost / effort

n=396

Appendix

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Great extent

Moderate extent

No/small extent

11/21/201079



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Note: 1Question asked: To what extent do you think the industry will evolve over the next five years to allow you to overcome the following barriers, Please rate the extent to which you will overcome the following barriers due to the evolution of the financial services industry on a scale of 1-6 where 1=Not at all and 6=To a great extentIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Clients, however, believe they will overcome the largest barrier - the effort associated with switching providers or products

Client Perception: Extent to which you will break down Barriers Toward Becoming more Active and Informed

(Percentage of Survey Respondents, Respondents, Rank Ordered by Total)1

Weak technology adoption


Cultural bias

Risk aversion


n=759

Appendix

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Great extent

Moderate extent

No/small extent

11/21/201080



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Provider Perception: Client Priorities(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Will the following capabilities become increasingly / less important to your clients over the next five years, Please rate factors on a scale of 1-6 where 1=Becoming less important and 6=Becoming more important.IBM / CFA Institute Survey; IBM Institute for Business Value analysis

Providers believe transparency and reputation will become increasingly important to clients

n=397

Appendix

Transparency



Customization

Quality advice / service excellence

Convenience

Modularity

CSR / green factors

On-stop-shopofferings

Global footprint

Moderately important Less important Will not changeMore important

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

11/21/201081



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Moderately important Less important Will not changeMore important

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Client Perception: My Priorities(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Will the following capabilities become increasingly / less important to you over the next five years, Please rate factors on a scale of 1-6 where 1=Becoming less important and 6=Becoming more important.IBM / CFA Institute Survey; IBM Institute for Business Value analysis

However, clients cited reputation and convenience factors as becoming increasingly important

Transparency



Customization


Convenience

Modularity

CSR / green factors

On-stop-shopofferings

Global footprint

n=767

Appendix

11/21/201082



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Provider Perception: Premiums for Top Five Client Priorities(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: How much would your clients be willing to pay over existing rates to ensure that you deliver on specific factors, Select 0%, 5%, 10%, 15% or more, don’t knowIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Providers believe clients will pay a premium for best-in-class offerings and tailored products

15% Premium

10% Premium

5% Premium



Customization

Transparency


Unbiased quality advice /

service excellence

n=398

Appendix

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

11/21/201083



Client Perception: Premiums for Top Five Priorities(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: How much would you be willing to pay over existing rates to ensure that your service provider effectively delivers on the following factors, Select 0%, 5%, 10%, 15% or more, don’t knowIBM / CFA Institute Survey; IBM Institute for Business Value analysis

However, clients will pay a premium for unbiased quality advice and client service excellence

15% Premium

10% Premium

5% Premium



Unbiased quality advice /

service excellence

Transparency


Customization

n=768

Appendix

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

0% 20% 40% 60% 80% 100%

11/21/201084



0% 10% 20% 30% 40%

Trust / estates

Annuities

Automated f inancial advice

130 / 30 strategies

Private banking services

Guaranteed funds

Structured products

Hedge funds of funds

Cash management

Private equity

Managed mutual funds

Direct investments

Separately managed accounts

Index funds / ETFs

Investment products that include advice

0% 10% 20% 30% 40%

Cash management


Guaranteed funds

130 / 30 strategies


Trust / estates

Annuities


Structured products


Direct investments

Private equity


Index funds / ETFs


n=366 n=364

Note: 1Question asked: Which investment products / services will be the most important for your clients to purchase to meet their strategic objectives over the next two and ten years, Select top twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Provider Perception: High Growth Products(Percentage of Survey Respondents, Rank Ordered by Total)1

Providers believe clients will demand advice-oriented products, private equity and passive funds

Current Future

Americas

EMEA

AP

Appendix

11/21/201085



0% 10% 20% 30% 40% 50% 60%

Annuities

Guaranteed funds

Trust / estates

Structured products

130 / 30 strategies



Private equity

Hedge funds




Cash management


Direct investments

Index funds / ETFs

0% 10% 20% 30% 40% 50%

Guaranteed funds


Structured products

130 / 30 strategies


Cash management


Annuities


Hedge funds

Trust / estates



Private equity

Index funds / ETFs

Direct investments

n=760 n=760

Note: 1Question asked: Which investment products / services will be the most important for you to purchase to meet your strategic objectives over the next two and ten years, Select top twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Client Perception: High Growth Products(Percentage of Survey Respondents, Rank Ordered by Total)1

However, clients are seeking direct investments as a first priority along with passive and private equity funds

Current Future

Americas

EMEA

AP

Appendix

11/21/201086



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Note: 1Question asked: How important will each of the following channels for buying financial services be to your clients over the next five years, Please rate each channel on a scale of 1-6 where 1=not important and 6=very importantIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Provider Perception: Channel Preferences(Percentage of Survey Respondents, Rank Ordered by Total)1

Providers believe face-to-face is the most important channel

Very important

Moderately important

Less important

Through independent

financial advisor

Through a bank financial

advisor

Direct through retirement plan

administrator

Online via primary advisor

website

Telephone

Mobile devices

n=390

Appendix

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

11/21/201087



Note: 1Question asked: How important will each of the following channels for buying financial services be to you over the next five years, Please rate each channel on a scale of 1-6 where 1=not important and 6=very importantIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Client Perception: Channel Preferences(Percentage of Survey Respondents, Rank Ordered by Total)1

However, clients believe online access is the most important channel

Very important


Less important

Through an independent

financial advisor

Through a bank financial advisor

Direct through retirement plan

administrator

Online via primary advisor

website

Telephone

Mobile devices

n=760

Appendix

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

11/21/201088



0% 10% 20% 30% 40% 50% 60%

Strongly disagree

Neutral

Strongly agree

Note: 1Question asked: To what extent do you agree / disagree with the following statements: Investment firms are likely to offer products & services in the investment firm’s own best interest; Please rank on a scale of 1-6 where 1=strongly disagree and 6=strongly agreeIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Both providers and clients believe providers fail to act in the clients’best interest

0% 10% 20% 30% 40% 50% 60% 70%

Strongly disagree

Neutral

Strongly agree

n = 711

Client Perception: Providers offer products in the firm’s best interest

(Percentage of Survey Respondents,Rank Ordered by Total)1

Americas

EMEA

AP

n = 762

Provider Perception: Providers offer products in the firm’s best interest


Appendix

11/21/201089



Note: 1Question asked: Which factors will evolve to allow your firm to be more active and informed when interacting with service providers, Please rate the extent to which each of the following factors will enable you to become more active and informed on a scale of 1-6 where 1=Not at all and 6=To a great extentIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Great extent

Moderate extent

No/small extent

Access to financial

information

Access to research /

tools

Ability to transact without

an intermediary


Regulation that creates

transparency


providers

Extent to which you are Becoming more Active and Informed when Interacting with Service Providers


n=401

Asset managers are becoming more active and informed

Appendix

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

11/21/201090



Note: 1Question asked: To what extent do you think the financial services industry will evolve to allow your firm to overcome the following barriers that prevent you from being more active and informed when interacting with service providers, Please rate the extent to which you will overcome the following barriers due to the evolution of the financial services industry on a scale of 1-6 where 1=Not at all and 6=To a great extentIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Extent to which you will break down Barriers Toward Becoming more Active and Informed when Interacting with

Service Providers(Percentage of Survey Respondents, Rank Ordered by Total)1

Great extent

Moderate extent

No/small extent


Weak technology

adoption

Cultural bias


Risk aversion

n=398

Asset managers are also becoming empowered

Appendix

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

11/21/201091



0% 10% 20% 30% 40% 50% 60%

Trust services

Middle off ice

outsourcing

Securities lending

Fund accounting

Servicing/prime

brokerage

Data analytics

Custody

n=251

Note: 1Question asked: Which custody-related outsourcing products and services will be the most important for your firm to purchase to meet its strategic company objectives over the next five years, Please select twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

High Growth Asset Servicing Products(Percentage of Survey Respondents, Rank Ordered by Total)1

Asset managers value custody, data analytics and ‘prime brokerage’ services from global custodians

Americas

EMEA

AP

Appendix

11/21/201092



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Transparency



Customization


Convenience

Modularity

On-stop-shop-offerings

Global footprint

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Note: 1Question asked: Regarding your firm’s interactions with your custodian, will the following financial services capabilities become increasingly important/less important to your firm over the next five years, Please rate factors on a scale of 1-6 where 1=Becoming less important and 6=Becoming more importantIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Priorities with Respect to Services Provided by Global Custodians(Percentage of Survey Respondents, Rank Ordered by Total)1

Asset managers will prioritize global custodians that provide quality advice, service excellence and have strong reputations

Less important

CSR / green factors

n=390

Appendix

More important Moderately important No Change

11/21/201093



Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Note: 1Question asked: Regarding interactions with your custodian, to what degree would you be willing to pay a higher amount over existing rates to ensure that your custodian effectively delivers on the following factors, Please select 0%, 5%, 10%, 15% or more, don’t knowIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Asset managers will also pay their custodian a premium for reputation, quality advice and service excellence

Premiums for Top Five Priorities for Services Provided by Global Custodians(Percentage of Survey Respondents, Rank Ordered by Total)1

15% Premium

10% Premium

5% Premium



Transparency


Customization

Quality advice / service

excellence

n=394

Appendix

0% 20% 40% 60% 80% 100%

11/21/201094



0% 10% 20% 30% 40% 50% 60%

Private placement

Financing

Structured product

creation

Prime brokerage

Agency execution /

trading

Principal execution /

trading

S/W to enable

trading

Research

High Growth Broker / Dealer Products (Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Which broker / dealer products and services will be the most important for your firm to purchase to meet its strategic company objectives over the next five years, Please select twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Asset managers value research, trading software and principal risk taking services from broker / dealers

n=251

Americas

EMEA

AP

Appendix

11/21/201095



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Note: 1Question asked: Regarding your firm’s interactions with broker / dealers, will the following financial services capabilities become increasingly important/less important to your firm over the next five years, Please rate factors on a scale of 1-6 where 1=Becoming less important and 6=Becoming more importantIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Asset managers will prioritize broker / dealers that have strongreputations, and provide quality advice and service excellence

Priorities with Respect to Services Provided by Broker / Dealers(Percentage of Survey Respondents, Rank Ordered by Total)1

Transparency



Customization


Convenience

Modularity

CSR / green factors

On-stop-shop-offerings

Global footprint

n=387

Appendix

Americas

EMEAAP

AmericasEMEA

AP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

AmericasEMEA

AP

Americas

EMEAAP

Less importantMore important Moderately important No Change

11/21/201096



Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

Americas

EMEA

AP

0% 20% 40% 60% 80% 100%

Note: 1Question asked: Regarding interactions with your custodian, to what degree would you be willing to pay a higher amount over existing rates to ensure that your broker / dealer effectively delivers on the following factors, Please select 0%, 5%, 10%, 15% or more, don’t knowIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Asset managers, however, will pay a premium to their broker / dealers for best-in-class offerings and for having a high quality reputation

Premiums for Top Five Priorities for Services Provided by Broker / Dealers(Percentage of Survey Respondents, Rank Ordered by Total)1

15% Premium

10% Premium

5% Premium



Transparency


Customization

Quality advice / service

excellence

n=393

Appendix

11/21/201097



Note: 1Question asked: How important will each of the following channels for buying broker / dealer services be to you over the next five years, Please rate each channel on a scale of 1-6 where 1=not important and 6=very importantIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Channel Preferences, Asset Manager to Broker / Dealer (Percentage of Survey Respondents, Rank Ordered by Total)1

Direct market access and crossing networks are expected to be the preferred broker / dealer channels for accessing liquidity

Very important


Less important

Direct market access

Buy side to buy side crossing network

Algorithms, proprietary

Phone broker

Alternative trading venues

Algorithms, broker supplied

Face-to-face

Broker via FIX

n=389

Appendix

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

11/21/201098



n=573

Perceived Winning Business Models of the Future(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Which business model type is best positioned for the future as measured by consistently meeting client needs, Select top twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Universal banks are expected to win (we disagree!)

0% 10% 20% 30% 40%

Combined manufacturers / custodians, e.g., BNYMellon

Specialized custodians e.g., State Street Bank splits from SSgA

Non-financial services f irms, e.g., Yahoo

Information specialists, e.g., Financial Engines

Specialized alternative investment firms, e.g., Covepoint Capital

Specialized distributors, e.g., Charles Schw ab

Combined manufacturer / advisor, e.g., Morgan Stanley

Diversified alternative investment f irms, e.g., Citadel

Specialized manufacturers, e.g., Wellington

Universal banks w ithout a large retail bank, e.g., Credit Suisse

Universal banks w ith a large retail bank, e.g., Citigroup

Americas

EMEA

AP

Appendix

11/21/201099



0% 10% 20% 30% 40% 50%

None

Prime brokerage services

M&A advisory from investment banks

Exchanges and clearing

Agency trading and principal trading

Money management and middle-office processing

Broker dealers/banks and back-office processing

Universal banking model

Alpha providers and beta providers

Risk management becomes a specialist advisory service no

longer conducted in-house

Discount brokerage and w ealth management

Insurance firms outsourcing asset management

Money management and providing unbiased investment advice

Wealth management and investment banking

Americas

EMEA

AP

n=573

Note: 1Question asked: Over the next ten years, where do you believe decoupling will occur across the financial markets value chain, Please select all that applyIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Anticipated Industry Unbundling(Percentage of Survey Respondents, Rank Ordered by Total)1

However, despite selecting universals, over 90% of executives foresee industry unbundling

Appendix

11/21/2010100



0% 10% 20% 30% 40% 50% 60%

Other

Interdealers, e.g., ICAP

Online agents, e.g., eBay

Broker Dealers trading

w ith each other, e.g.,

Project Turquoise

Asset managers trading

w ith each other, e.g.,

Liquidnet

Exchanges, e.g., NYSE /

Euronext

n=562

Perceived Winning Liquidity Models of the Future(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Which type of provider is most likely to gather the most liquidity share in the future, Select top twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Exchanges and buy-side to buy-side trading are expected to be the winning liquidity models

Americas

EMEA

AP

Appendix

11/21/2010101



n=570

Note: 1Question asked: Which financial markets will likely bundle/integrate to a greater extent over the next 10 years, Please select all that applyIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Anticipated Industry Bundling(Percentage of Survey Respondents, Rank Ordered by Total)1

Most believe asset managers will build up research capabilities and that lines will blur between hedge funds and traditional funds

0% 10% 20% 30% 40% 50%

None

Hedge funds offering investment banking services

Integration of siloed product groups

Online aggregation and advice across f inancial services providers

Investment banks 'renting' balance sheets of retail banks

Integration of siloed functions by geographies

Integration across back off ice to ensure better delivery capabilities

Custodians selling back office processing to broker/dealers

Bundling products to service sovereign w ealth funds

Asset managers building up trading capabilities

Bundling products and advice such as balanced funds or guaranteed

annuity funds

Forming alliances to enter new markets

Hedge funds offering traditional asset management and vice versa

Asset managers building up research capabilities

Americas

EMEA

AP

Appendix

11/21/2010102



0% 10% 20% 30%

Asset servicers / custodians / clearing firms

Lenders

Data and information vendors

Indexers / ETF money managers

M&A advisors / underw riters

Private bankers

Hedge funds

Independent financial advisors

Exchanges

Traders

Discount brokers

Financial consultants

Traditional active money managers

Retail brokers

None

n=567

Note: 1Question asked: Which industry players are most likely to be disintermediated / replaced in the future, Please select up to threeIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Anticipated Industry Extinctions(Percentage of Survey Respondents, Rank Ordered by Total)1

Executives do not foresee many business model ‘extinctions’

Americas

EMEA

AP

Appendix

11/21/2010103



Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Americas

EMEAAP

Business and Operating Model Levels of Proficiency(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: In your opinion, how proficient is your firm at performing select activities, Rate on a scale of 1 to 6, where 1=We are weak compared to others and 6=We are best in classIBM / CFA Institute Survey; IBM Institute for Business Value analysis

IT agility and scale efficiencies are the largest areas of weakness

Best in class

Ability to implement / leverage new technologies

IT agility

Forming alliances

Ability to execute on objectives

Scale efficiencies

Ability to move into new markets

Risk management


Business agility

Product innovation

n=388

Appendix

Weak proficiencyModerate proficiency

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

11/21/2010104



Note: 1Question asked: Within the next five years, in which areas will your firm invest most heavily in order to develop strategic capabilities, Please select twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

n=523

Business Model Areas of Investment(Percentage of Survey Respondents, Rank Ordered by Total)1

Top areas of ‘business’ investments include client analytics, new product development and risk management

0% 10% 20% 30% 40% 50% 60%

Compensation structures

Expanded regulatory

compliance capabilities

Alternative sourcing

strategies

Process transformation

Expanded risk management

capabilities

New product development

Client analytics

Americas

EMEA

AP

Appendix

11/21/2010105



n=470

Technology Areas of Investment(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Within the next five years, in which areas will your firm invest most heavily in order to develop strategic capabilities, Please select twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Expected areas of technology investment include SOA, component capabilities and expanded risk management capabilities

0% 10% 20% 30% 40% 50%

Other

Web 2.0 / online transformation

Collaboration capabilities

IT application portfolio rationalisation

Infrastructure scalability

Expanded risk management capabilities

Service-oriented architecture / Component capabilities

Americas

EMEA

AP

Appendix

11/21/2010106



n=524

Note: 1Question asked: How will your firm build, or improve, its focus on the client over the next five years, Please select twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Client-related areas of Investment(Percentage of Survey Respondents, Rank Ordered by Total)1

Firms expect to invest in hiring specialized talent and improving delivery and client analytic capabilities

Americas

EMEA

AP

0% 10% 20% 30% 40% 50% 60% 70%

Address client governance model

Adjust compensation schemes

Mitigate client conflicts of interest/product suitability

Develop cross-organisation reporting/recording

capabilities

Form alliances

Invest in client data analytics

Improve delivery/connectivity

Hire, train, promote talent w ith specialised expertise

Appendix

11/21/2010107



n=517

Risk-related areas of Investment(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: How will your firm improve its ability to manage risk holistically over the next five years, Please select twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Top areas of risk investments include risk analytics, specialized talent and addressing governance issues

Americas

EMEA

AP

0% 10% 20% 30% 40% 50% 60%

Adjust compensation

schemes

Form alliances

Develop cross-organisation

reporting/recording/analysis

capabilities

Adjust risk management

governance model

Hire talent w ith specialised

expertise/training

Invest in risk analytics

Appendix

11/21/2010108



n=522

Note: 1Question asked: How will your firm create scale efficiencies over the next five years, Please select twoIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Scale efficiency-related areas of Investment(Percentage of Survey Respondents, Rank Ordered by Total)1

Firms expect to invest in designing flexible architectures and component capabilities along with knowledge sharing

Americas

EMEA

AP

0% 10% 20% 30% 40% 50%

Take advantage of w age arbitrage

Address governance model

Create a diverse management team

Form alliances

Centralise certain activities

Optimise resources globally

Develop know ledge sharing capabilities

Design a f lexible architecture / create component

capabilities

Appendix

11/21/2010109



n=521

General Skills that will be Difficult to Attract and Retain(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Which general skills sets will be the most difficult to attract for investment positions over the next five years, Please select all that applyIBM / CFA Institute Survey; IBM Institute for Business Value analysis

The highest demand ‘general skills’ will be problem solving and communication skills

0% 10% 20% 30% 40% 50%

Physics

Computer science

Economics

Mathematics

Financial engineering

Communication skills

Problem solving skills

Americas

EMEA

AP

Appendix

11/21/2010110



0% 10% 20% 30% 40%

Buildings / properties

Procurement

Procesessing

Application development

Administration

Human Resources

Trading

Management of alliances

Product management

General management

Compliance

Financial management

Information Technology (IT)

Product development

Strategy & planning

Client service

Sales

Portfolio management

Risk management

n=523

Functional Skills that will be Difficult to Attract and Retain(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Which functional skills sets will be the most difficult to attract for investment positions over the next five years, Please select all that applyIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Risk and portfolio management are in demand ‘functional’ skills

Americas

EMEA

AP

Appendix

11/21/2010111



n=510

Note: 1Question asked: Which financial instrument skill sets will be the most difficult to attract for investment positions over the next five years, Please select all that applyIBM / CFA Institute Survey; IBM Institute for Business Value analysis

Financial Instrument Skills that will be Difficult to Attract and Retain(Percentage of Survey Respondents, Rank Ordered by Total)1

Skills in derivative instruments will be the most sought after ‘instrument’ skills

0% 10% 20% 30% 40% 50% 60% 70%

Fixed income

Equities

Derivatives

Americas

EMEA

AP

Appendix

11/21/2010112



n=537

Title of Participants(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: Which of the following best describes your titleIBM / CFA Institute Survey; IBM Institute for Business Value analysis

0% 10% 20% 30%

Chief administration officer (CAO)

Chief technology off icer (CTO)/Technology director

Treasurer

Chief information off icer (CIO)

Board member

Chief operations officer (COO)

Economist

Chief Financial Officer (CFO)

Controller

Strategist

Head of Business Unit

Senior Vice President (SVP)

Chief investment off icer (CIO)

Managing director

Chief Executive Off icer (CEO)/President

Director

Vice President (VP)

Portfolio manager

Analyst

Americas

EMEA

AP

Survey segmentation by executive title

Appendix

11/21/2010113



n=534

Global Assets Under Management of Participants(Percentage of Survey Respondents, Rank Ordered by Total)1

Note: 1Question asked: What are your organization’s global assets under management in US dollarsIBM / CFA Institute Survey; IBM Institute for Business Value analysis

0% 10% 20% 30%

US$20 billion to less than

50 billion


5 billion


20 billion


250 billion

US$250 million to less

than 1 billion

More than US$250 billion

Less than US$250 million

Americas

EMEA

AP

Survey segmentation by assets under management

Appendix

11/21/2010114




Fact-based strategic insights for senior executives

This study is a product of the IBM Institute for Business Value (IBV). The IBV provides senior executives with strategic insights that address critical challenges faced by organizations in their quest for business value in today's rapidly-changing, technology enabled environment.

The Institute provides research and analysis, dialogue with industry experts, and client events focused on critical industry and cross-industry issues.

About the Institute

Formed in 2001, the IBM Institute for Business Value is staffed with experienced industry consultants worldwide with primary offices in Cambridge (Massachusetts), New York, and Amsterdam. Throughout the year, IBV teams collaborate with business executives from

leading companies and with IBM professionals on studies that can help you to:

Anticipate industry changes

Identify and assess strategic alternatives

Quantify the expected return on key initiatives

Formulate roadmaps for moving forward

Determine the best metrics for measuring success.

For more information, contact [email protected]

090420 a new financial order - 114 page abridged version for financial markets

Economy & Finance

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