Investors First: Rebuilding the Advice Business Around ......Source: Casey Quirk Advisor Database...

www.caseyquirk.comConfidential and Proprietary. For internal client use only. © 2017 Casey Quirk

0 0ADVANCING THE FUTURE OF INVESTMENT ADVISORY SOLUTIONS

Investors First: Rebuilding the Advice Business Around Client Needs

Introduction:Arlen Oransky, Senior Vice President, Chief Membership & Programs Officer, MMI

Presenters: J. Tyler Cloherty, Senior Manager, Casey Quirk by DeloitteChloe H. Gardner, Consultant, Casey Quirk by Deloitte

NetMeeting

November 15, 2017 | 12:00 PM ET


1 1ADVANCING THE FUTURE OF INVESTMENT ADVISORY SOLUTIONS

Upcoming MMI Events


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Proprietary and Confidential – For Casey Quirk and Casey Quirk Client Use OnlyCONFIDENTIALITY NOTICE: This presentation and the information contained herein is intended for the

internal use of the client. Any review, dissemination, distribution, or copying of this presentation

or information other than in its intended client business purpose is strictly prohibited.

Investors First: Rebuilding the Advice Business Around Client NeedsCasey Quirk/MMI Key Study Findings

November 15th, 2017

J. Tyler Cloherty, Senior Manager, Casey Quirk by Deloitte

Chloe H. Gardner, Consultant, Casey Quirk by Deloitte


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Our survey encompassed a majority of critical players in US wealth management

Sample Participants

Source: Casey Quirk Advisor Database 2017, Cerulli Associates, Morningstar Direct, Tiburon Strategic Advisors, Casey Quirk Analysis

Survey Sample

28 Asset Managers

Demographics

16 Wealth Managers

$11.8T AUM

$14.1T AUM

Financial Advisors

>650

Key Firm Profiles

Biggest Digital Advice Firms by AUM

40%

Largest 10 Broad Wealth

Platforms by AUM70%

Leading Investment Solutions

Product Providers9/15

Top 10 US Retail Active 3Y Flow Winners

60%


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Changing investor demands will reshape the value chain and product requirements

Changing investor needs will require advice firms to adapt

The value of advice creation and delivery will increase

Asset managers must follow a clear path to succeed

Expand Advice Capabilities into areas

of increasing value1

Provide best-in-class Investment

Components2

Compete by offering product at lower

Cost than competitors3

Investors are demanding advice that aligns with future cash flow needs…

…yet the current approach remains investments-focused and insufficient to produce quality results

Successful advice firms will develop a client-centric offering that:

• Delivers personalized outcomes

• Provides firm-level, data-driven sales and customer experience

The new advice value chain will increasingly emphasize elements outside of product:

Sales/Client Acquisition

Outcome Customization

Advice Delivery

Data and analytics will become key inputs to driving value and scalability

This landscape will change how investment products are distributed


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Investors currently have unmet advice needs and preferences

Source: Casey Quirk Advisor Database 2017, CFA Institute, Casey Quirk Analysis, Fidelity Investments Retirement IQ Survey 2017

…and are placing greater focus on outcomes over investment performance

19%

Achieves specific investment goals/outcomes

Non-investment advice (financial

planning)

73%

2%

Achieves the highest return

Other

6%

Future Expected Most Important Investment Advice to Investors

Investors are not satisfied with the investment services they receive…

ValueTrust

Investors that believe that their advisor charges fees that

“reflect the value” they get

Retail investors that “completely trust”

their financial professional

37%43%

74% of investors in a recent survey underestimated the amount of money

they would need in retirement


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Today’s advisor-driven model is insufficient to deliver high quality outcomes…

Costly

Source: Casey Quirk Advisor Database 2017, Casey Quirk Analysis

Advisors’ preference to control advice and relationship management leads to poor outcomes…

Portfolio Construction Approach

Time Dedicated to a Customized Portfolio Per Year

…and a lack of scalability

31%% Time Spent on

Investment ActivitiesScalable

49%Customized

51%

Average Clients 356

Time Spent Building Customized Portfolios

~3 Hrs.

Costly

Inefficient

Variation in investment results…

…and client experience

Brand confusion

Non-transparent


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…and wealth managers typically focus on accumulation and investment returns

Value Added to Retirement PortfolioAnnualized Asset Growth, Optimized Account vs. Investment-Only Account

Value Trend:

Key

High Relative Growth

Relative Growth

Relative Decline

HighRelative Decline

Traditional Investment

Advice

Traditional emphasis, but less than half of potential

wealth growth

3.53%

1.19%

0.61%

9.66%

2.11%

2.05%

0.18%

Non-Investment Advice

Makes up 63% of potential wealth growth, but typically provided as an

ancillary service or by outside providers (e.g. tax attorneys)

Potential Annualized

Asset Growth

Account Selection

Capital Market Returns

Withdrawal Strategy

Debt and Liability

Advice Capabilities:

Estate Planning

Note: Calculated over 65 year horizon from first contribution to bequeathment. Source: 2016 Casey Quirk Advisor Study, CFP Board, Casey Quirk Analysis

Tax Optimized

Investments


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Advice providers recognize the misalignment and have begun to evolve

Sources: Casey Quirk/MMI Survey 2017, Casey Quirk Advisor Database 2017, Casey Quirk Analysis

They are centralizing portfolio construction and spending more time with clients

27%

27%

12%

13%

Home Office Driven Models

Scalable Advisor Practice Models

-12%Customized

Portfolios-53%

Advisors

Home-Offices

Growth of Portfolio Construction Approach By Type of Respondent, 2017-2020e

Advisors are beginning to emphasize services where they uniquely add value

32%

65% 62%

93%

65%

32% 32%

2%3%

Risk and compliance

analysis

2%

Due diligence on asset

managers

Relationship management

6% 5%

Financial planning

analysis/tools

Activities Best Provided by Home Office vs Advisor% of total FA Respondents, 2017

Advisor Time Spend on Client Facing ActivitiesBy Percent Time Spend, 2015-2020e

Advisor/Practice

NeitherHome Office2015 2017

44%40%38%

2020e


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Winning firms will embrace five systematic changes to their business

Financial Advice Winning Factors

Current State Future State

Value for Fees & Transparency

Standard Market PricingPricing

Sales and Service

Data-driven, Personalized Sales and Service

Relationship-based Model

Advice Value Proposition

Financial Planning & Goals-based Advice

Investment Returns

QualityCustomization

Mass CustomizationLimited to HNW

Customer Experience

Enterprise-WideDriven by the

Advisor


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Future value will be placed on advice customization and delivery rather than product

Investor

Sales/

Client Acquisition

Outcome Customization

Product Selection & Fulfillment

Advice Delivery & Relationship Management

Areas of growing importance

Data & Analytics

Investment Advice Value Chain


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The future advice model will center around the creation of a customized plan

Actuarial

Healthcare Optimization

Long-term Budget Planning

Debt and Credit Management

Tax & Estate Planning

Pivotal Life-Event Advice

Generational Transfer

Aggregating data and creating actionable insights will be the key to a successful outcome customization engine

Ag

gre

ga

tio

n a

nd

In

sig

ht

Cre

ati

on

Client Data

CostlyUnique Blend of Proprietary Data and Third-Party Data

Ability to Aggregate and Centralize Data

Expertise to Synthesize Data into Tangible Advice

Robust Client Data Acquisition & Feedback Loop

Seamless Product Fulfillment

Outcome Customization Winning Factors

Cu

sto

miz

ed

Ou

tpu

ts

Assumption Data

Cash Flow Projections

Health Data

Capital Market Data

Risk Preferences

Education Costs

Household Data

Debt & Liabilities

Plot Client Information Against

Market Data

Design Scenario-Driven Options and

Advice

Refine and Update Through Data and

Client Input


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Historical Present

Sales and delivery will seamlessly deliver the breadth of the firm’s expertise

Single point of contact that is human centric

and investment focused

Specialized services encompassing full wealth

management, but separately

Financial AdvisorD

efin

ing

Feat

ure

s

Financial Advisor

Call Center

Relationship Manager

Investment Experts

Lone Financial Advisor

Multiple Siloed Services

Retirement Planning

Mortgage Services

Future

Level of contact that is complexity-based and can include digital and/or in

person relationships

Modular, Integrated Engagement

Digital

Tax/Legal ExpertsLoan

Specialists


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Percent of Firms* Experiencing Positive & Negative Flows, 2013-2015

Percent of Firms* Experiencing Positive & Negative Flows, 2013-2015

Advisor decision makers decrease

170K

22K

2015

31K

Exiting 2021Outsourcing

102K

15K

Teaming

Number of Advisor Investment Decision Makers2015 vs. 2021, K

Source: Casey Quirk Advisor Database, Cerulli, PriceMetrix, Casey Quirk Analysis

Evolution in advice creation will change how investment product is distributed

• Longer sales cycle

• Larger mandates

• Prevalence of consultants

• Preference for style consistency

• Technical engagement at point of sale

• Longer holding periods

The buying process will change

11%

Positive Impact; HO can better negotiate fees

Most products are commoditized, substitutes are okay

Other39%

Potential deal breaker for relationship

with HO

22%28%

Product menus consolidate

Advisor View on Product Menu Collapse


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Investment product providers must consider three strategic routes to win

Fight on Cost

Fight On Quality

Expand into growing parts of the value chain

Data and analytics to create customized outcomes

Advice delivery through sophisticated expertise, digital offering etc

Leverage scale and efficiency to price out competitors

Low cost product delivered through scale or operational efficiencies

Differentiated fee approaches to better align with investor goals or minimize extraneous fund expenses

Deliver differentiated, high performing products

Target more niche audience with truly unique IP

Create product with specialized customization capabilities

Align components with allocator demands and preferences

Vertically Integrate


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Asset managers have a range of options to extend into more valuable advice services

Data & Analytics Advice Delivery Outcome Construction

Growing Value Chain Components

Entr

y P

oin

tEx

amp

les

Investor

Sales

OutcomeConst.

Product

Advice Delivery

Key Opportunities for Asset Management Expansion

Providing a direct, digital offering

Building network of advisors

Acquisition or exclusive partnership with distributor

Multi-asset products

Embedded solutions at intermediaries

Risk management data

Market assumption data, etc.

Data


16

Firms can successfully embrace fee pressure as a differentiator

Sources: Morningstar Direct, Casey Quirk AnalysisNote: Analyses include US mutual funds and ETFs

Buyers are seeking products with lower fees

Low Cost Strategic Paths

-$400 $400$0 $800

Passive

Active

Cheapest 25%

Remaining 75%

US Fund Net New FlowsBy Expense Ratio Quartile, 2014-2016 3Y Flows, $B

1Scale/Volume

2Operating Platform

3Pricing

Structures

Options

Offset the decline in costs through large volume and

operational scale

Minimize extraneous costs in manufacturing, distribution, and operations to maintain margin

amid low pricing

Consider unique pricing structures that align interests and compete

with low-fee offerings

Managers are responding by compressing their fees

0.21

0.80

0.17

0.75

PassiveActive

2013

2016

US Funds Expense Ratio2013, 2016, Active vs Passive

4 Consider methods to minimize the investor cost outside of the mgmt.

fee (admin., tax, vehicles, etc.)Minimize Extra

Expenses


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Managers can win on quality by evolving along several key dimensions

Sources: Morningstar Direct, Casey Quirk Analysis

-$667

$39

Median-75th

-$313

$405

-$322

-$436

$93

-$649

Below 25th Above 75th25th-Median

-$628

$310

$631

$214

Positive Flows

Negative Flows# of Total Funds Included: 4,957

Active products still garner flows, but performance will be table stakes

In addition to performance, managers need to distinguish across four factors

Active U.S. OEF 3Y Flows by 3Y Excess Return Percentilevs. Morningstar Category Peers, Q3 2014 - Q2 2017, $bn

Description

High quality, flexible offerings tailored to meet specific needs of partner

firm

Deep relationships with key distributors/partners

Firm brand and performance tied to

distinct value proposition

Technology-enabled engagement model

complemented by value add tools & services

Differentiated Offerings

Access to Distribution

Investment Leadership

Brand

Specialized Engagement

Winning Characteristics

Number of Funds:

1,2001,226 1,239 1,292

www.caseyquirk.com

Tyler Cloherty, Senior ManagerCasey Quirk by [email protected]

Chloe Gardner, ConsultantCasey Quirk by [email protected]

Investors First: Rebuilding the Advice Business Around ......Source: Casey Quirk Advisor Database...

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