Pershing Ria Market Forecast

8/7/2019 Pershing Ria Market Forecast

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Unchartd Watrs:navigating the forces shaping the advisory industry

i W LmsM

Our artner in deelointhis exeutie summar:

Moss Adams LLP


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Unharted Waters: Naiatin the ForesShain the Adisor Industr

In the midst of tremendous rowth and transformation, the entire adisor

industr is enterin unharted waters. This is eseiall true for the indeendent

Reistered Inestment Adisor (RIA). A ariet of market fores are at la,

romisin to radiall hane the was in whih adisors serie lients and

omete for new business. Based on our own researh and onsultin exeriene,

interiews with industr exerts, and an extensie reiew of reent third-art

researh, we hae identified three ke fators of reat imortane to the RIA:

1) Dramatic growth of the RIA market expected to fuel increased competition. The demand

for comprehensive and objective financial advice is growing rapidly. Responding to this demand

without undermining the client experience or compressing margins will put pressure on the

physical and intellectual capacities of advisory firms. In addition, market growth is attracting

a host of new market participants, which compels the traditional independent RIA to find

innovative ways to differentiate themselves. Regulatory changes are helping to fuel this growth,

especially as they relate to the promotion and clarification of the advisors fiduciary obligation

to clients. For the RIA, this is conceivably a be-careful-what-you-wish-for scenario, however.

An important differentiator is lost if competing channels adopt the same fiduciary standards

previously owned by the RIA.

2) Growing demand for advice from increasingly sophisticated clients. Clients are poised

to play a more influential role in defining the advisory relationship. This may seem intuitively

obvious, especially since the term client-centric is now commonplace. For the most part,

however, clients have been more deferential than assertive in demanding solutions and service

commensurate with the fees they pay. Today, the clients power is growing, driven by sweeping

demographic changes and increasing consumer sophistication and greater expectations for service.

Advisors can no longer afford to persist in their perception that they may sell whichever product

theywant to a client. Advisors must become more selective about which markets they service to

ensure an effective and consistent client experience. In addition, they must clearly communicate

to clients their particular value proposition within their market nicheand in a way that isstrategically distinct from competitors.

3) Competition among RIAs for top talent. Recruiting and retaining the best talent is more

important than ever, and these remain the biggest hurdles for independent advisory firms.

Competent, adaptive, and well-trained expertise is critical to an advisory firms success. The

rapidly growing market requires ever-more-complex servicing, and demand is skyrocketing while

supply fails to keep pace. To ensure growth, firms must be more innovative in their recruiting,


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but merely poaching talent is not sufficient. Firms must increase their commitment to developing

talent from within their organizations and restructuring incentive compensation programs to retain

talent. Furthermore, more of their overhead costs should go into training and performance coaching.

Organic growth has given most RIAs tremendous lift in the past five years, but soon they will

have to fight to maintain profitable growth. In the future, leaders of advisory firms will be

increasingly challenged by the demands made by both their clients and their staff, who now

occupy positions of increasing power.

As a result, these three trends will all have profound implications for the industry, in generaland

for individual advisory firms, in particular. To navigate these effectively, the successful RIA will

need new charts and, in some cases, whole new systems of instrumentation. We explore these

themes in detail in the pages ahead, elaborating on their importance, detailing implications for

advisors, and prescribing appropriate courses of action.

Imitation Is th Gratst Form of Flattry

The consequence of building a better mousetrap is that innovation attracts a lot of fansas well

as a lot of imitators. This was certainly the case for financial advisement, when financial planning

and wealth management providers latched on to the independent RIA platform. In the past five

years, the number of retail RIA firms grew by one-third;1 in the next five years, Moss Adams

expects the industry segment will grow by another third. Of those industry participants who have

not yet established RIAs, many are either becoming more like them or acquiring them, outright.

Many of the largest RIA firms are being acquired by banks, trust companies, and consolidators.

The stakes are high. Excluding inflation, we anticipate that investable assets of U.S. households

will grow by more than $5 trillion in the next five years, creating an estimated $35 billion of new

revenue opportunities for the advisory industry. To successfully capitalize on these opportunities,

RIAs will need to be innovative in their services and recognize emerging needs beyond the generic

label of boomers in retirement.

Stratgic Comptition: Whr Winnrs Writ Thir Own Ruls

As a variety of financial services-related providers converge upon the same target, the pressure is

on the independent RIA. Wirehouse brokers, insurance agents, bankers, and even mortgage brokers

are adopting some of the characteristics that distinguish RIAstransforming their business models

to compete in offering comprehensive and objective financial advice to affluent households. Even

the RIAs ability to distinguish itself based on its independence is under threat, as competitors

shift from commission- to fee-based pricing structures and shed proprietary products.

In the past, the independent RIA benefited greatly from consumers relative inexperience.

Consumers did not walk through the doors of advisory firms with set expectations of which

1 Cerulli Associates, Cerulli Quantitative Update: Advisor Metrics 2006.


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IDEAS WITHOUT LIMITS ii

processes their advisors would use, how many meetings they should have, which reports they

should see, or who would service them. The unprejudiced attitudes of consumers allowed RIAs

the flexibility to define their service model, including which clients they would work with, as well

as how they would work with them.

Defining a problem and asserting your prominence as the best solution provider is what we

call strategic competition. In the overall advice marketplace, independent RIAs are strategic

competitors as long as they enjoy a leadership positionby helping consumers identify their

needs and framing the types of solutions available, directly or indirectly. How do consumers know

if they are ready for retirement? How should they evaluate the investment strategy defined by their

advisor? Should they have an advisor in the first place? Who is an advisor? Strategic competitors

will target and influence how consumers answer these questions.

The market may not remain this open forever, however. National firms are moving to influence

the terms of competition by defining service models, pricing structures, customer expectations,

and the measures of success. They are already marketing heavily to consumers and looking to

frame their needs and concerns in a manner that suits larger firms. Furthermore, as the industry

matures, its products and services tend to become more standardized. This, in turn, will challenge

the ability of competitors, and particularly smaller firms, to differentiate from each other.

The risk for independent advisors is that providers capacity for strategic differentiation will fade,

to be replaced by a tactical mle of market agents (advisors) rushing to establish rapport and

credibility with potential clients. In essence, the RIA may face a tactical battle under rules

determined by others. In this scenario, the danger for RIAs is that they may be left to watch

from the sidelines. Most RIAs are essentially small businesses. They lack the marketing resources,sales force, and sheer scale to compete effectively in such a marketplace.

The importance of strong differentiation and strategic positioning for the independent advisor

cannot be overstated. Historically, RIAs have relied on the independence proposition, their

individualized attention to the client, and fee-based pricing to differentiate from competing

distribution channels. In the future, these will not be enough.

Successful advisors will need to possess an intimate understanding of their clients and knowledge

of their unique issues in order to deliver specialized expertise and solutions. Social, political, and

religious beliefs will also demand consideration, in addition to such factors as age, profession,

sources of wealth, risk tolerance, and life goals. The firm of the future will identify the unique

nature and needs of these client niches to create and service markets in which the firm is truly

differentiated. The real advantage of the RIA firm is its ability to recognize and attend to the

nuances that are imperceptible to national firms but which clients highly value. This RIA

advantage must be further leveraged by developing and applying service expertise tailored and

targeted to market niches.


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Clints Will Shap th Futur

Whether clients know it or not, they are in the drivers seat for determining the kinds of

relationships they have with their financial advisors. However, most clients do not presentlyunderstand the full extent of their influence and bargaining power. This is partly due to consumer

uncertainty about the services offered by various providers and about the distinctions between

such industry terms as investment advice, financial planning, and wealth management. In

addition, many clients do not yet appreciate how many providers are competing for the privilege

of servicing them and the intensity of this competition.

Todays relatively low level of consumer awareness is poised to improve. Consumer understanding

of what an advisor isand how to choose and evaluate onewill be defined with much greater

specificity in the next few years. All industry stakeholders will play a role in forcing clarification.

Consumers will feel increasingly compelled to become better educated as they take on growing

responsibility for their financial futures. The introduction of new service models will help form

expectations. Finally, other market participants, including regulators and industry and consumer

associations, will also fuel the movement toward greater awareness.

As clients become informed consumers, advisors must again be mindful of clearly positioning their

service offerings. This means being deliberate about the type of client served. Further, it means

educating clients on the key areas where the RIA can specifically add value as the steward of the

clients financial future.

Consumers are making big and bold changes in their lives, which will further set the terms of

their relationships with advisors. Choice dictates some of these changes; necessity, others. The

nature of retirement, itself, is changing. Retirement is becoming a transitional period in the career

cycle, instead of signaling its end. It is no longer defined by the image of a retiree waiting for

pension checks and clipping coupons. Furthermore, society is placing a higher responsibility on

individuals to prepare and provide for their own financial futures, a future in which investments

are only one component.

Servicing clients through these changes creates the need to handle much more than their assets.

Generating investment returns fades in importance, replaced by the ability to manage client cash

flows in a way that reliably matches assets with liabilities. Advisors unable to adapt to changing

client needs risk losing relationships to advisors who can.

Rlationships Will B Won Basd on Trust

National full-service firms (wirehouses)2 now recognize the power of a true advisor who can

create a strong and lasting relationship with the client, and they are looking for ways to create a

2 In this report, we use the terms wirehousesand national full-service firmsinterchangeably to signify large, branded broker-dealers such as Merrill Lynch,Smith Barney, and UBS (among others).


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service model with the same appeal to the investor that RIAs offer today. Throughout the industry,

competitors are becoming more alikein terms of pricing, product, planning focus, and manager

choices. Consolidation is further blurring the boundaries between advice delivery channels. As the

typical RIA grows, even the difference in size between national firms and the independent RIA is

getting smaller. The one enduring difference, however, is an organizations culturethe advisors

attitude and approach when he or she is face to face with a client, in private.

Overwhelmingly, trust is the characteristic that clients look for and expect in an advisor, as

consumer research demonstrates.3 Advisors must recognize, however, that while professional

integrity and objectivity are necessary conditions for developing trust with clients, they are not

sufficient on their own. Expertise and competence must also be demonstrated, and these will be

increasingly sought after as client needs become more complex.

Trust is most easily created between the client and the advisor; few clients associate trust with

a firm. In order to build long-term value and remain a viable business, however, the successful

firm will learn to expand this relationship of trust to encompass the client andthe firm. Doing so

requires a corporate culture of ethicsone beyond reproachand an ability to recruit and retain

advisors who convey this culture to clients.

Team-based service delivery further helps the firm establish trusted relationships with its

clients, which extend beyond the trust a client has in any one advisor. Teams, with each

individual playing a specialized role, are also better equipped to deliver on the promise of

expertise. In addition, teams are able to personalize the client relationship, while at the same

time institutionalizing the knowledge of the client. Adoption of team-based service deliverya

relatively easier transition for RIAs than for most distribution channelsis yet another way forthe RIA to stand apart from competitors.

Advisor Dvlopmnt and Rcruitmnt Must B a Priority

To stand out and to position themselves as trustworthy, credible, and knowledgeable, firms

must consistently develop or attract advisors who, in turn, convey these attributes to their

clients. The individual reputation and skills of a firms advisors play a decisive role in the

strength of client loyalty. Ultimately, the quality of the advisor remains the most powerful

and lasting competitive differentiator.

While competition for clients will be intense, the real competition among providers is for skilled

advisors. The demand for professionals is already high, with 37% of advisory firms reporting

that they are actively recruiting experienced professionals.4 Moss Adams forecasts that by 2012,

there will be close to 52,000 advisors practicing inside RIA firms, a net increase of 9,000 advisors

over the next five years. Dramatic industry growth, however, is just one of the factors leading to

3 See, for example, U.S. Trust, 2004 U.S. Trust Survey of Affluent Americans.

4 Moss Adams LLP, 2007 Compensation and Staffing Study, Sponsored by JPMorgan Asset Management and SEI Advisor Network, 2007.


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a shortage of talent throughout the industry. Considering the impact of current demographics

on the need for replacements, the actual number needed is probably a few thousand more. The

typical advisor, like their clients, is rapidly approaching retirement.

An escalating requirement for firms to broaden their skills sets further challenges in terms

of the industrys ability to meet its human capital needs. Business development, relationship

management, retirement, health care, taxes, and estate planning are just some of the key areas

where skills are most needed. New investment and insurance products are also taxing the ability

of advisors to stay current.

If an independent RIA firm can win the difficult battle for talent, it will be firmly positioned to

confront most any other future competitive challenge. As a first step, the RIA firm will be forced

to aggressively recruit from wirehouses, banks, and other channels in the industry. Doing so

requires firms to emphasize features of the RIA business model that are not easily replicated

within other distribution channels. These include a service orientation that emphasizes process

over products and the chance for advisors to receive equity in the firm and grow value of this

ownership over time.

The ability and patience to grow people is another advantage the RIA must exploit. Often, the

right person for a given position simply does not exist in the current market. To assure a steady

and reliable supply of talent, the importance of developing talent from within the firm must not

be overlooked. Specialized training for advisors will be critical.

Furthermore, larger RIAs, in particular, should have in place career paths that facilitate the

development of existing personnel, in addition to attracting desirable new personnel. SmallerRIAs, unable to offer formal career tracks, may need another approach for attracting and retaining

recruits. This would include emphasizing opportunities for ownership, more rapid business growth,

and the chance to handle a wider breadth of responsibilities than is possible at larger firms.

Stratgic Positioning Lads to th Sa of Opportunity

Most of all, the findings in this report should highlight the importance of differentiation and

strategic positioning. In the next five years, consumers will make better choices of advisors, and the

nature of advice will become better understood. This will create opportunity for the independent

RIA, but it also means that firms will need to clearly define their target clients and carefully

position their service offerings against all sectors and channels of the broad investment industry.

Demographics, while important, are only a starting point for understanding and targeting clients.

All clients are not the same; their needs differ even within the same generations and levels of

wealth. More specific niches must be identified, better understood, and serviced accordingly.

Relationships will be won by delivering custom, targeted service models that emphasize innovative

approaches, multiple planning capabilities, and the resources to deal with complexity. RIAs are

well-poised to continue their impressive successif they devise and commit to the right course.


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Aknowledments

Much of the insight presented in this report was gleaned from interviews with some of the advisory

industrys brightest thinkers. Our goal was to solicit a variety of perspectives from different

organizations, including government, academia, regulatory bodies, industry associations, and service

providers. Among those who generously gave their time to this project are the following:

Nam Titl Organization

Chris Boruff President, Advisor Business Morningstar, Inc.

Dale Brown Executive Director & CEO Financial Services Institute

Steven Levitt Principal Cambridge International Partners Inc.

Steven Miyao CEO kasina

Avi Nachmany Executive Vice President,Director of Research

Strategic Insight

John Nofsinger Associate Professor of Finance,Lang Fellow, and Author ofPsychology of Investing

Department of Finance, Insuranceand Real Estate, Washington StateUniversity

Mary Shapiro Chairman and CEO NASD

Ellen Turfe Chief Executive Officer The National Association of PersonalFinancial Advisors


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Table of contents

Exeutie Summar ................. .................. ................... .................. .................. .................. .... i

Imitation Is the Sinerest Form of Flatter .........................................................ii

Stratei cometition: Winners Write Their Own Rules ..............................ii

clients Will Shae the Future ..................................................................................i

Relationshis Will Be Won Based on Trust ........................................................i

Adisor Deeloment and Reruitment Must Be a priorit.........................

Stratei positionin Leads to the Sea of Oortunit ................................i

Aknowledments ...............................................................................................................ii

Table of Fiures ......................................................................................................................xi

A Risin Sea of Demand .......................................................................................................1

Aumulators ...................................................................................................................2

Identifin and Takin Adantae of Oortunit ................................3

proidin Aess to Alternatie Inestments ............................................3

Tendin to philanthroi Interests ................................................................4

The Bottom Line .....................................................................................................4

consolidators ...................................................................................................................5

chanin Needs Inrease Risk of Defetion ..............................................6

The Bottom Line .....................................................................................................8

Liquidators ........................................................................................................................8

Redefinin Retirement, challenin Adisor caabilities ..................9

Addressin Health care plannin Needs ................................................. 11

The Bottom Line .................................................................................................. 12

consumer Interest and preferenes ................................................................... 12

growin Interest in Finanial Series and Exert Adie ............... 12

Resondin to Sudden Eents ...................................................................... 13

Seekin Adie, performane, Deleation ............................................... 14

choosin an Adisor, choosin to Sta .................................................... 14

Winnin and Maintainin Relationshis ................................................. 16

The chanin Landsae of cometition ................................................................ 17

RIAs Must Frame consumer Deisions .............................................................. 18

creatin customer Demand ......................................................................... 20

Influenin the Frame of Ealuation ......................................................... 22

Who you Are Is Irreleant, but What you Do Matters ................................ 23

positionin value ............................................................................................... 23


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growth Will create Larer and More cometitie RIAs ............................ 26

cometin in a consolidated Industr ..................................................... 27

Winnin the Larest clients .......................................................................... 30

cometitie positionin and the Blurrin of Serie Models .................. 32

Deeenin Exertise ......................................................................................... 34

cometin Throuh Teams ........................................................................... 34

The Disaearin Affiliation Model ........................................................... 35

Indeendene....................................................................................................... 36

Reutation ............................................................................................................. 36

grantin Deision-Makin Authorit ........................................................ 37

Firms comete Not Just for clients, but for Adisors ................................. 38

comensatin Adisors ................................................................................... 39

Res Behain Like Adisors .......................................................................... 40

The Role of Reulation ...................................................................................................... 41

Jurisdition Frition .................................................................................................... 41

The Double-Eded Sword of Reulation ........................................................... 41

pension protetion At .............................................................................................. 42

401(k): The Last plan Standin? ................................................................... 43

Ot-In Adotion .................................................................................................. 44

New Oortunities for Adie Delier .................................................... 44

Fiduiar clarit ........................................................................................................... 45

The RIA of the Future ......................................................................................................... 47


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Table of Fiures

Fiure 1: Raid pae of growth continues for Household Inestable Assets ............ 1

Fiure 2: Aumulators More At to Inest in Alternaties .................. ................... .......... 4

Fiure 3: Sementation of Inestable Assets b Ae ................ .................. ................... .......5

Fiure 4: U.S. Adult poulation b Ae, 2000-2030 ............................................................... 6

Fiure 5: Likelihood of Takin Business to a cometitor b Ae and

Retirement Status .............................................................................................................7

Fiure 6: Swithin of primar proider b Ae grou .................. ................... .................. .7

Fiure 7: Retirement Assets Held b Those Aed 60+ ($T) .................................................8

Fiure 8: Aerae Annual Inomes for pre-Retired and Retired Sements ................ .9

Fiure 9: Adie ga ................ ................... .................. .................. .................. ................... ..............11

Fiure 10: Sudden Eents That chane Inolement........................ ................... .................13

Fiure 11: Imortant Attributes When choosin an Adisor .................. .................. ........15

Fiure 12: To Loalt Driers Equated With primar Adisor ................. .................. .....15

Fiure 13: porters Fie Fores Affetin cometitie Strate ................. .................. .....18

Fiure 14: RIAs Make U 14% of All Adisors ............................................................................19

Fiure 15: choosin an Adisor Is a Four-phase proess..................... ................... ..............20

Fiure 16: Eerbods an Exert ................... .................. .................. ................... .................. ........24

Fiure 17: Historial and projeted Number of RIA Firms ................... .................. ..............26

Fiure 18: Aerae Historial and projeted Assets of an RIA Firm, 2003-2012 ........27

Fiure 19: perentae of Firms b Size Owned b a parent coman...........................28

Fiure 20: perent of RIA Firms Whose Taret client Is Larer Than $10 Million .....30

Fiure 21: Median AUM per client b Firm Reenue ................ ................... .................. ........31Fiure 22: client Distributed b Net Worth ................ .................. ................... .................. ........31

Fiure 23: Series Offered b Stae of Firm Deeloment .................. .................. ...........33

Fiure 24: Emloee Model s. Indeendent Model ................. ................... .................. ........37

Fiure 25: Historial and projeted Number of Adisors in RIA Firms ................ ...........38

Fiure 26: Firms Antiiatin New Hires (2003 and 2005) .................................................39

Fiure 27: Adisor comensation ................. .................. .................. ................... .................. ........39

Fiure 28: Workers With pension coerae b Te ................ ................... .................. ........43

Fiure 29: Imat of Auto-Enrollment on 401(k) partiiation .........................................44

Fiure 30: Seleted Adisor Attributes: A Dauntin Arra of choies ................. ...........46


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A Risin Sea of Demand

The United States reresents the worlds larest and most sohistiatedmarket for finanial adisor series. As of2006, areate household net

wealth was $53.3 trillion,5 of whih $21.6 trillion were in relatiel liquid or

inestable finanial assets (Fiure 1).

Figur 1. Rapid Pac of Growth Continus for Houshold Invstabl Assts

Note: Total financial assets less equity in noncorporate businesses and pension reserves. Inflation-adjusted to current (2006) dollars using CPI-U.

Sources: Moss Adams LLP, Federal Reserve, U.S. Dept. of Labor

Growth in investable assets has been unprecedented in recent decades, tripling in the past 25 years.Annual increases in assets averaged 4.8% since 1982after adjusting for inflation. This growth

comes in spite of the stock market bust of 2000-2002. In comparison, assets fell on average at a rate

of 1.9% from 1972 to 1982. Preceding this was a period of prosperity, with asset growth averaging

4.5% from 1956-1971.

We predict the current inflation-adjusted 4.8% average asset growth will continue for another

five years at minimum. Sustaining this asset growth is the combination of pre-retirees, younger

generations, and an encouraging regulatory climate. Thus, excluding inflation, investable assets

of U.S. households are forecast to grow by more than $5 trillion in the next five years, creating

$35 billion of new revenue opportunities for the financial advisor. Further, its important to

note that not only are more assets becoming available; more assets are coming under professional

management, as we discuss in more detail in this report.

Will these opportunities persist beyond the upcoming baby boomer retirement wave? How can

RIAs take advantage of these opportunities, now and in the future?

5 Historical data for household net worth and investable assets estimated by Moss Adams LLP from Federal Reserve data-Flow of Funds Accounts of the

United States, Flow of Funds Z.1 Files, June 7, 2007. Adjusted for inflation using the U.S. BLS Consumer Price Index for All-Urban Consumers.

0

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$TRILLIONS


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Part of the answer lies in the shifting trends of demographics and consumer behaviorand this

means understanding more than just the needs of those much-discussed baby boomer clients.

Advisors must be prepared to help clients across three broad stagesaccumulation, consolidation,

and liquidation. They must also recognize that who falls into these stagesand whenis not

always clear-cut.

> Accumulators. Accumulators are those who are just beginning to seriously save and invest. For

many, the first savings goal is purchasing a new home, and not retirement. These individuals are

typically young adults, less than 45 years in age.

> Consolidators. Consolidators are winding up their prime savings years and preparing in earnest

for retirement. Typically 45 to 64 years in age, most of todays consolidators are part of the

baby boomer generation.

> Liquidators. Liquidators are drawing down their savings. While most are liquidating assets

for the purposes of direct consumption in retirement, others are distributing assets to heirs or

charitable causes. These individuals are typically 65 years or older in age.

Accumulators

The typical advisors current growth strategy is set squarely on servicing the financial needs of

consolidators. From the advisors perspective, this is a rational approach, given the scope of the baby

boomer market, as well as the wealth and opportunity it has created in the past decade. That said,

the advisory firm of the future cannot operate by looking solely through a rear-view mirror. Advisors

should consider opportunities both within and beyond the baby boomer segment.

An alternate opportunity exists for identifying and solving the financial needs of post-boomer

generations, those who are still in accumulation mode. Todays accumulators are the first true

investor generations in which responsibility for saving and investing is within the near total control

of the individual. Spurred by necessity brought on by the demise of the defined benefit retirement

plan and uncertainty surrounding Social Security, this age group should prove to be more savings-

oriented, financially conservative, investment-focused, and proportionately greater consumers

of advice than their parents. A variety of research supports these claims, including the following

examples:

> Being financially successful is important to 49% of those in the 18-28 age group, a 13%

increase since 2002.6

> This same age group feels a significantly greater need to manage their spending (77%) compared

to their parents in the 43-61 age group (66%).7

6 Visa, How America Spends, as reported in Visa news release, As Baby Boomers Begin Transfer of Economic Influence, Echo Boomers Displaying

Practical and Mature Spending Habits, May 23, 2007.




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> The percentage of workers aged 21 to 30 participating in a retirement plan at work is up to

37%, compared to 32% five years ago.8

> Retirement plan participants under the age of 35 are one-third more likely to want advice inchoosing their investments than those over 35.9

Identifying and Taking Advantage of Opportunity

To win post-boomer business, advisors will need to focus less on empathetic sales pitches and more

on an advisors ability to assist clients in accumulating wealth and properly managing a clients risk

exposure. The traditional marketing techniques of advisornamely, an offering of independent,

objective, and customized advice, will not have currency within these groups. The financial demands of

todays accumulators are more complex than those of their predecessors, which means that relationships

will not be won on the margin. Moreover, business will depend on the ability of the advisor to identify

inflection points in the financial lives of their potential clients and deliver targeted solutions.

Advisory firms must first understand how and why customers make decisions within a target market

segment. For accumulators, decisions will usually be event-driven. For example, an outside event

may force recognition of the incumbent advisors inability to service their needs. Worth noting are

the expected inheritance windfalls of post-boomers with $1 million or more in investable assets.

Some 44% of this group, 27 to 41 years in age, expects to receive an inheritance of over $1 million.10

Additional event-driven financial decisions could include a substantial medical outlay or recovery

from an improper investment strategy. Advisors will have to properly identify what event has caused

an individual to seek advice, look at the clients needs within the context of the firms capabilities,

and clearly identify how they can construct and implement a service solution.

Once high-probability, profitable customers have been identified, it is up to the advisor to deliver a

superior product, given their understanding of the financial needs of the consumer. Customization

can be a risky tool in the advisors toolkit, but it will be necessary in order to capture this market

segment. Financial planning for accumulators will be complicated and will need to address issues

specifically related to alternative investments, philanthropic concerns, inheritances, and health care

planning. These needs cannot be met by a generic client service experience.

Providing Access to Alternative Investments

Accumulator millionaires have a noticeably higher allocation of alternative investments than older

generation cohorts (Figure 2). This allocation highlights a broader trend of investment advice

focusing on outcome-related investing as opposed to benchmark-relative investing.

8 Employee Benefits Research Institute, as reported in NU Online News Service, Retirement Plan Participation Up for Young Workers, June 2007.

9 Spectrem Group, as reported in PLANSPONSOR.com, Workers Under 35 Not Confident About Retirement Future, March 27, 2007.

10 Northern Trust, Wealth in America 2007. The Northern Trust Company, January 2007.


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Figur 2. Accumulators Mor Apt to Invst in Altrnativs

Note: Individuals with $1 million or more in investable assets. Accumulators are 27-41 in age; consolidators, 42-60; liquidators, 61 and over.

Source: Northern Trust, Wealth in America 2007, January 2007.

Advisors cannot rely on an offering of the latest, in-vogue asset class. Like any industry, investment

products have a well-defined product lifecycle, meaning advisors can only use access to alternative

investments as a differentiator for a discrete period of time. The key is for advisors to capture

early innovators who perceive the firm as cutting-edge and are willing to pay for this perception.

Todays alternatives are tomorrows plain vanilla, and an advisor must create a culture that embraces

innovation and change before a market, and its opportunities, stagnate.

Tending to Philanthropic Interests

Younger generation accumulators will seek advice from like-minded advisors, and this means a

philanthropic mindset. Their strong preference for philanthropic giving has already surfaced: 81%

of 18- to 28-year-olds indicate they are giving what they can to charities.11 In 2006, 26% of

post-boomer millionaires (27-41 years in age) made charitable contributions in excess of $20,000,

compared with just 15% of boomer millionaires (42-60 years in age).12 Advisors who are conversant

in philanthropic opportunities, as well as their impact on the financial well-being of their clients,

will be able to deliver a powerful message that resonates with todays accumulators. If they do not

develop this capability internally, a key step will be for advisors to network and develop contacts in

their clients communities who can shepherd a client through the process of philanthropic giving.

Advisors who can tend to their clients preference for a hands-on approach to philanthropy will stand

out in the advisory marketplace.

The Bottom Line

Capturing the accumulator market will require a service offering that can be distinguished from that

pitched to their predecessors. Their financial needs will be characterized by complexity, and most

opportunities will be created by an outside event in a clients life that compromises their financial




LIQUIDATORSCONSOLIDATORSACCUMULATORS

28%

19%

12%


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picture. Relationships will be won by delivering custom, targeted service models that emphasize

innovative approaches to alternative investments, philanthropic planning capabilities, along with

resources to deal with the increasingly burdensome issue of personal and family health care planning.

A team-based approach that leverages the collective expertise of a set of financial professionals will

provide the most appropriate structure for establishing, closing, and maintaining relationships.

Consolidators

Consolidators, making a final push to build up wealth they hope will last them through

retirement, are in their prime savings years. As a result, consolidators are the most significant of

the three broad market segments, accounting for an estimated $8.4 trillion in investable assets. 13

As shown in Figure 3, consolidators (45-64 years of age) represented 54% of all investable assets

in 2004, and will peak at 55% in 2010.

Figur 3. Sgmntation of Invstabl Assts by Ag

Source: Survey of Consumer Finances, 2004; U.S. Census Bureau; McKinsey & Company, Asset Management Industry in 2010, 2007.

The number of individuals between the ages of 45-64 grew rapidly, but after an expected increase

of 75% in the two decades leading up to 2010, little if any growth is anticipated thereafter (Figure 4).

As a result, the asset accumulation associated with consolidators will remain strong in the near

future, but will begin to flatten in the next three to five years.

13 Individuals between 40-59 years of age. Source: Playing the Long Game: Global Asset Management in 2006. Boston Consulting Group, 2006.

2020

+75

64-74

55-64

45-54


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Figur 4. U.S. Adult Population by Ag, 2000-2030

Note: 2010-2030 are projections.

Sources: Moss Adams LLP; U.S. Bureau of the Census

Changing Needs Increase Risk of Defection

Aside from the sheer volume of assets that consolidators represent, what is important to note about

this group is their pending, very significant change in financial status and related needs. As they

approach retirement and liquidator status, the interests of most will shift from whether they will

have enough to live on to mapping out a plan for living on what they have. The wealthiest of

consolidators will soon be shifting their attention toward how best to leave a legacy, either through

passing assets down to heirs or through charitable giving.

In the immediate years before retirement, clients needs for an advisor grow and typically change.

Frequently, there is realization that the advisor who carried them through their working yearsmay not have the appropriate skills to carry them through retirement. Viewed another way, these

vulnerabilities represent opportunities for other firms better able to establish loyalty and capture

defecting clients from firms who have failed to underscore their ability to serve the client through

the accumulation, consolidation, and liquidation phases.

More than half of all consumers switch their primary financial providers after the age of 40.14

Retirement and age seem to be especially correlated with retention risk, as demonstrated in

Figures 5 and 6.

14 McKinsey & Company, Cracking the Consumer Retirement Code, 2006.

0

50

100

150

200

250

300

MILLIONSOFPEOPLE

65+

45-64

20-44

2030202020102000


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Figur 5. Lilihood of Taing Businss to a Comptitor by Ag and Rtirmnt Status

Note: Households with at least $1 million in financial assets. Respondents were asked to indicate the likelihood that they would perform

various actions.

Source: VIP Forum, 2003 Survey of Affluent U.S. Households, 2003.

Figur 6. Switching of Primary Providr by Ag Group

Source: McKinsey & Company, 2006 Consumer Retirement Survey, 2006.

This data, combined with what we know to expect from the current and future waves of aging

and retirement, suggest that potential client defections will continue to present advisory firms with

challenges, as well as opportunities, for many years to come.

0%

2%

4%

6%

8%

10%

RETIREESPRE-RETIREES

Age 50-60

60+Years

0%

10%

20%

30%

40%

71+60-7050-59UNDER 40 40-49


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The Bottom Line

Consolidators are a large part of the advice market that is difficult to ignore, and they will continue

to be significant for the next several years. They are a market in transition, howeverand in order to

retain these clientsadvisors must grow and adapt to their increasing and changing needs. Advisors

must continually anticipate the next stage of their clients transition, addressing their needs before

these clients have a chance to question the advisors adequacy for providing. Further, advisors should

recognize that due to its fluid nature, the consolidator market is also ripe with opportunity. Targets

include not only the dissatisfied clients from other advisory firms, but also first-time advice seekers

compelled to seek guidance during this important period in their financial lives.

Liquidators

The ranks of retirees will swell dramatically in the next five to ten years, creating a multitude of

complex demands. The needs of most will revolve around managing the risk of outliving assets. Thewealthiest will be more concerned with preserving or distributing wealth for heirs or charitable causes.

As previously shown in Figure 4, by 2010, baby boomers will begin spilling into the 65 years and

over liquidators bracket, which will become the fastest growing market segment. Further fueling

the growth of the senior citizen population will be increasing longevity due to advances in living

standards and health care. The average 65-year-old in 2004 was expected to live to be 83.3 years

old.15 This compares to just 79.3 years in 1960. From 2010 to 2030, the population that is 65 and

over will increase nearly 80%. As a result, one in five Americans will be older than 65 by 2030,

compared to just one in eight in 1990.16

Due to an aging population, by 2020 liquidation mode assets will make up 38% of investable assets,up from just 32% in 2004 (Figure 3). Another estimate, illustrated in Figure 7, shows assets nearly

doubling in the six years from 2006 to 2012.

Figur 7. Rtirmnt Assts Hld by Thos Agd 60+ ($T)

Source: Federal Reserve Survey of Consumer Finances, Cerulli Associates, August 2004.

15 National Center for Health Statistics, Health, United States, 2006, With Chartbook on Trends in Health of Americans. Hyattsville, MD: 2006.

16 Moss Adams LLP analysis based on U.S. Bureau of the Census population estimates.

2012E2009E2006E2003

$19.5

$14.1

$10.9

$6.4


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The most obvious implication of an aging client base for the financial advisor is the much-heralded

shift in focus from asset accumulation to preservations or distribution. Research conducted by the

Retirement Income Industry Association, presented in Figure 8, illustrates the need for liquidation

to occur at all income levels for retirees to maintain pre-retirement living standards.

Figur 8. Avrag Annual Incoms for Pr-Rtird and Rtird Sgmnts

Source: Larry Cohen and Elvin Turner, RIIA Retirement Topology, Consumer Research Results, RIAA conference presentation, February 13, 2007

The growing senior population is significant for advisors in several ways. The financial needs of

the 65+ age group will become increasingly complex and demand higher levels of service; and the

opportunity to manage the assets of this age group should remain strong as well. The traditional

life cycle savings approach would suggest that asset accumulation will transition to distribution at

this stage, reducing the asset management opportunity. Many liquidators, however, may continue

to work part-time and remain active well into retirement, minimizing asset draw-down. As the baby

boomers have introduced so many new paradigms in their past, they will also redefine retirement as

they fashion a post-65 lifestyle to suit their needs and desires.

Redefining Retirement, Challenging Advisor Capabilities

Similar to the ways in which they have tended to blur the lines between work and personal life

throughout their careers, there is no clear line defining when boomer generation retirees stop working.

For many, retirement simply means relinquishing the job you had to do and switching to the job you

want to do. Among men aged 65 and over, labor force participation rates hovered at about 15% from

1984 until 1999 and then started rising gradually, reaching nearly 20% in 2006.17 A recent national

survey reported that 21% of Americans between 35 and 64 say they will be working forever.18

MARkeTS PRe-ReTIReD ReTIReD PeRCeNTAGe DeCLINe

Walthy $242,000 $106,000 44%

Afflunt $125,000 $64,000 51%

Mass $66,000 $35,000 53%

Marginal $27,000 $17,000 63%

17 Leora Friedberg, The Recent Trend Towards Later Retirement, Center for Retirement Research, March 2007.

18 GfK Roper Public Affairs & Media survey sponsored by Bankrate, Inc. as reported in PLANSPONSOR.com, 21% of Adults Say They Will Work

Until They Drop, April 23, 2007.


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The growing senior citizen share of the adult population will also fuel the continued rise in the role

of women as financial decision-makers, as women on average live seven years longer than men. In

2000, women made up 59% of the over 65 population, and 71% of individuals over 85. Beyond

simple demographics, survey research and anecdotal evidence point to a growing involvement of

women in household investing. Demonstrating an understanding of womens unique financial needs

is among many new skills that advisors will need to acquire.

Servicing the pending wave of liquidator wealth comes with a host of more specific implications.

As the financial needs of aging clients grow in complexity, generating investment returns fades in

importance and is replaced by the capability to manage cash flow, reliably matching assets with

liabilities at future points in time. In most cases, the advisors primary goal will be to manage the risk

that clients will not outlive their assets. In addition to coping with capital market volatility, this

also means hedging against the uncertainties of inflation, longevity, and health care requirements.

For the wealthiest liquidators, the efforts of advisors will be focused on wealth preservation, anddistribution of assets to heirs and charitable causes.

To adequately service the liquidator, advisors must take on a more administrative role and be

prepared to provide guidance on a variety of issues, which may include the following:

> Estate planning and charitable giving

> Retirement planning

> Reverse mortgages

> Medicare, Medigap, and prescription drug plans

> Critical illness and long-term care insurance

> Longevity insurance

> Tax-efficient sequencing of withdrawals across taxable and nontaxable accounts

> Guaranteed income strategies

Tremendous market opportunities await firms who succeed in differentiating themselves on the basis

of these broader aspects of retirement. Unfortunately, many of todays advisors are ill-prepared to

meet even the most basic of these needs. For example, over half of millionaire households do not

receive asset allocation or retirement planning help from their advisors. As shown in Figure 9, many

advisors remain focused on dispensing investment advice at the expense of financial planning. The

investment-focused advisor can realize efficiencies from a more narrow service offering, but may be

giving up a stronger client relationship and deeper share of wallet.


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Figur 9. Advic Gap

Notes: Households with at least $1 million in net worth, excluding primary home.

Source: The Phoenix Companies, 2006 Phoenix Wealth Survey, March 2006.

Addressing Health Care Planning Needs

Perhaps the gravest deficiency in the ability of advisors to service liquidators is in the area of health

and long-term care. Health care costs have outpaced general inflation for years and have recently

been growing at 10% annually. The Employee Benefit Research Institute estimated in 2006 that

a couple should expect to spend $295,000 for health care premiums and out-of-pocket expenses

during retirement. If they live to age 95, they should expect to spend as much as $550,000.19

In most cases, clients do not yet fully understand the scope of the health care crisis that they may

potentially face. An even bigger issue is agreement over who will foot the bill on future health care

costs. More than two-thirds of consumers believe their employer will provide health benefits to

retirees, while only one-third of employers actually do.20

While health care costs are likely the biggest risk to success of a retirement plan, only 7% of financial

advisors rate themselves as well-equipped to deal with health care issues.21 The share of clients who

want advice on long-term care (28%) is more than triple the percentage of advisors who provide it

(8%).22 Even younger generations are concerned. Accumulator millionaires rated rising health care

costs as a greater concern (42%) than issues such as tax increases (35%) and the viability of Social

Security and Medicare (30%).23

80%

ESTATE

PLANNING

TAX

PLANNING

RETIREMENT

PLANNING

ASSET

ALLOCATION

INVESTMENTS

70%

60%

50%

40%

30%

20%

10%

0%

19 Jilian Mincer, Retiree Health Coverage No Longer Sacred, Dow Jones Newswires Column, May 21, 2007.

20 McKinsey & Company, The Retirement Journey, 2006.

21 Maya Ivanova and Dawn Kehler, The ABCs of Retirees, Investment Advisor, January 2007.

22 Fidelity Investments, Adapting a Practice for Retirement Planning, April 24, 2007.



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The Bottom Line

The liquidator wave will bring a close to the era in which an advisor could differentiate solely based

on being good at investing. Retirees are already dramatically changing the client base for advisory

firms, opening up opportunities, as well as exposing vulnerabilities for advisors. To succeed, advisors

must develop new skills and expertise. Increased share of wallet and market share can be won by

firms who successfully position themselves as overall retirement administrators, coordinating the host

of new financial-related issues that surface in the liquidation phase.

Consumr Intrst and Prfrncs

Demographic wealth trends go a long way toward helping advisors understand client needs and

determine a business and service model that will sustain future success. Less quantifiable perhaps,

but no less important, are the attitudes and motivations that drive consumer behavior. Ultimately,

success in winning and retaining good clients is dependent on first understanding shifts in consumerinterests and preferences, and second, on delivering what people truly want and value.

Many consumers have yet to seek the services of an advisor, but will in the future as the need for

a financial advisor becomes increasingly standard. Further, those consumers who already have a

financial advisor will continue to represent opportunity for competitors. No particular distribution

channel or firm type yet dominates in terms of client loyalty, and consumers will become increasingly

vulnerable to defection as they age, retire, and discern the specific advice they need.

Growing Interest in Financial Services and Expert Advice

Research indicates that increasing involvement by individuals with their investments and greater

interest in expert advice will continue to support advisory firm growth, even if household investableasset growth slows. The result is a greater proportion of overall household financial assets that are

professionally managed. Specifically, these factors are fueling the market:

> Greater involvement. In a 2006 NASD-funded investor survey, 60% of responding

individuals indicated their involvement in savings and investments has increased.24

> More seeking advice. In 1995, an ICI survey found that 59% of all mutual fund shareholders

had consulted with a financial advisor when making investment decisions.25 Eleven years later,

a similar ICI survey estimated that 73% of mutual fund investors consulted a financial advisor

before purchasing a mutual fund.26

> Professionally managed asset share up. On a percentage basis, total professionally managed

AUM represented nearly 60% of total household financial assets in 2005, up from 55% at

year-end 2000.27

24 Tahira Hira and Cazilla Lolbl, Gender Differences in Investment Behavior, Milestone 3 Report, August 31, 2006.

25 Investment Company Institute, Understanding Shareholders Use of Information and Advisors, Spring 1997.

26 Investment Company Institute, Understanding Investor Preferences for Mutual Fund Information, August 2006.

27 Cerulli Associates, Asset Manager Survey Key Findings, September 2006.


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Managing your financial affairs without professional assistance is increasingly viewed in much the

same vein as defendants serving as their own lawyers, or car owners replacing the brakes themselves

instead of hiring a mechanic. All of these activities can be done without training or certification, but

the stakes in terms of personal risk are too high not to delegate them to qualified professionals.

Surely, at some point in the future, the increasing propensity for individuals to seek professional

financial advice will taper off as professional advice becomes universally accepted. There is no

indication of this happening any time soon, however, as a good share of the market still appears

ripe for conversion. A recent Cogent Research survey of affluent middle-aged investors found that

more than one-third do not work with an advisor.28 Another survey sponsored by ING indicated

that one-third of all consumers say friends, relatives, and co-workers are their most reliable sources

for financial information.29

Responding to Sudden Events

One of the experts with whom we spoke succinctly summed up what motivates a consumer to seek

professional advice. There are essentially two types of consumers. The first type recognizes the value

of advice. For this group, seeking an advisor is simply based on achieving a certain level of net worth.

The second type does not initially recognize the value of advice. This group is not drawn to advice

until a tragic event occurs, shaking their confidence in managing their own investment affairs.

Survey results appear to support this argument (Figure 10). When asked about significant events

that increased their involvement in savings and investments, sudden financial gain is among the

leading mentions. In the category of tragic events, death and divorce are especially motivating

factors for women.

Figur 10. Suddn evnts That Chang Involvmnt

Note: Respondent questioned about type of life event (primary reason) that changed their involvement in saving and investing.

Source: Tahira Hira and Cazilla Lolbl, Gender Differences in Investment Behavior, Milestone 3 Report, August 31, 2006.

28 Charles Paikert, Clients Loyal But Investors Wary, Survey Says, Investment News, January 29, 2007. Results based on Cogent Research LLCsInvestor Brandscape survey of 4,000 investors. Investors were born between 1956 and 1964 and had investable assets of more than $100,000.

29 ING U.S. Financial Services, Many View Retirement Planning More Difficult Than Parenting, , January 12, 2007.

0%

05%

10%

15%

20%

25%

DIVORCEDEATHRETIREMENTSUDDEN

FINANCIAL GAIN

CHILDRENMARRIAGE

ALL

MEN

WOMEN


28/64


As one might expect, other leading events that increase interest in savings and investment are

marriage, children, and retirement. Somewhat surprising is that retirement ranked number four

overall, given all the focus on retirement as a current industry catalyst.

Performance and Delegation

Once an individual decides to seek expert advice, what specifically does he want the advisor to

provide? In the most general terms, clients come to advisors for three primary reasons:

> Provision of expertise or insight

> Better investment performance

> Desire to delegate

Most clients, in some way, are looking for expertise or insight that will better enable them to achieve

their financial goals. Desire for expertise can come in the form of taking advantage of a specialist,

getting a different perspective or objective opinion, or simply access to certain types of information.

Ranking much further behind is the desire to delegate, and the expectation that the advisor will

achieve better investment performance than the client could on his or her own. Regardless of what

initiated their visit, clients who come to an advisor for the first time often do not appreciate the true

breadth of services available. The advisors and the industrys challenge is education concerning the

deeper value proposition an advisor can potentially offer clients.

Choosing an Advisor, Choosing to Stay

Despite the growing recognition for expert financial advice, consumers spend more time researching

a new car purchase, job opportunity, or doctor than they do researching a financial advisor.30 In

defense of the consumer, these findings may be attributed to lack of clarity or good information

concerning how to evaluate an advisor. As a result, clients tend to find advisors largely through referrals.

According to the latest survey research from Moss Adams, about two-thirds (65%) of all new clients

come to an advisor through a referral.31 This proportion is constant regardless of a firms service

model or affiliation. Further, of the clients coming in through referrals, the vast majority (66%)

are a result of referrals from existing clients.

Once the referral is made, the new relationship between client and advisor is cemented based

on the clients impressions of the advisors expertise and trustworthiness, and, to a lesser extent,

investment performance.

30 ING U.S. Financial Services, Many View Retirement Planning More Difficult Than Parenting, , January 12, 2007.

31 Moss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by SEI Advisor Network and JPMorganAsset Management, 2006.


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Figur 11. Important Attributs Whn Choosing an Advisor

Note: Percent ranking attribute most important when asked, When selecting an advisor, what attributes do you care most about?

Source: State Street Global Advisors/Knowledge@Wharton, Bridging the Trust Divide: The Financial Advisor-Client Relationship, May 2007.

The survey results presented in Figure 11 found trustworthy to be by far the most frequently

ranked attribute in terms of importance when choosing an advisor. Based on a recent Phoenix

Affluent Marketing Service survey, once the relationship is formed, the strongest loyalty driver is

the advisors knowledge and the quality of advice providedin other words, the advisors expertise,

which is consistent with the reason why clients use advisors (Figure 12).

Figur 12. Top Loyalty Drivrs equatd With Primary Advisory

Note: Based on 7,396 interviews. The data are weighted to be representative of affluent households nationally (minimum of $250,000 in investableassets and/or $150,000 household income).

Source: Phoenix Affluent Marketing Service, Financial AdviceThe Next Commodity?September 2006.

TOP

PERFORMER

LOW COSTS

FOR SERVICES

PROVIDED

KEEPS ME

REGULARLY

INFORMED

UNDERSTANDS

MY NEEDS

AND GOALS

TRUST-

WORTHY

80%

70%

60%

50%

40%

30%

20%

10%

0%

KNOWLEDGE OF ADVISOR,

QUALITY OF ADVICE

TRUST, HONESTY, DEPENDABILITY

INVESTMENT PERFORMANCE

SERVICE, QUALITY,

PROBLEM RESOLUTION

NUMBER OF SERVICES

WITH ADVISOR

14%

15%

18%22%

31%


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While trust and expertise serve to attract clients, even the most knowledgeable, trustworthy advisor

can lose clients. In another survey, clients ranked poor portfolio performance, a factor often outside

an advisors control, far above others when asked what are the top reasons to switch advisors.32 Other

research cites lack of attention as another primary motivator for defection.

Moss Adams research, however, suggests that client defection is relatively rare. The latest data indicate

that advisory firms, on average, lost about 5% of their existing client base during 2005.33 By service

model, financial planners experienced the lowest defections. By affiliation, independent RIAs had

the lowest defections.

That said, advisors cannot ignore the importance of guarding retention. Consumer research does not

indicate strong loyalty associated with any particular distribution channel. Few firms have been able

to consistently capture loyalty, either. Further, there are particular points in the lives of clients when

the client becomes especially vulnerable to defection, as we noted in our discussion of consolidators.

Winning and Maintaining Relationships

Clients will be won based on the establishment of trust and credibility; advisory firms ignore

consumer preferences at their peril. Even in the absence of competition, an increasing number of

consumers will be vulnerable to defections due to age and retirement. As clients age, needs change,

and clients reevaluate the ability of their current advisor to meet the new challenges.

The focus on trust and expertise best positions the advisor, and not the firm, to influence client

loyalty. Clients and prospects will be most influenced by the advisors ability and reputation for

serving clients in a manner that is credible and knowledgeable.

For firms to stand out and position themselves as trustworthy, credible, and knowledgeable, theymust consistently attract and retain advisors who, in turn, convey these attributes to their clients. This

requires compensating and incenting these behaviors within advisory firms. Further, expertise must be

a focus with advisor training and sufficient support from technical specialists. Finally, firms should be

mindful of the need to have a corporate culture and ethical behavior that is beyond reproach.

32 The Phoenix Companies, 2006 Phoenix Wealth Survey, March 2006.

33 Moss Adams LLP, 2006 Financial Performance Study of Financial Advisory Firms, sponsored by SEI Advisor Network and JPMorgan Asset

Management, 2006.


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The chanin Landsae of cometition

Intensifin ometition is ineitable in a market with more than 300,000adisors. Adisors hae alwas been able to define their own serie model,

and fae relatiel few situations in whih the lient is ealuatin them

aainst seeral ometitors. The daner in the future is that the lare national

firms will define both onsumer serie exetations and riin, leain

indeendent RIAs in the role of endors rather than stratei ometitors.

To understand the landscape of future competition, it is important to know how recent events in

the industry have shaped investor expectations, and in turn, generated opportunities for independent

registered investment advisors.

Scandals at the national full-service firms drove consumers to look for fiduciary objectivity in their

advisors. The current success enjoyed by RIAs resulted from the powerful message of fees as a

conflict-free pricing model, and the acceptance of strategic asset management (asset allocation) as

a model of investment by mainstream consumers. Thus, RIA firms benefited from macro forces,

but they could not control those forces. Now each RIA has to proactively position itself to be

competitive, rather than wait for benefits that result from market forces.

The standard framework for competitive analysis was developed by Michael Porter, a leading

authority on competitive strategy; it focuses on five forces: 1) the bargaining power of customers,

2) the bargaining power of suppliers, 3) the threat of new entry in the industry, 4) the threat ofsubstitute products, and 5) the nature of the competitive rivalry.34 Using Porters Five Forces, we

have focused our analysis on:

1) The decision-making processthat consumers go through, and the ability of advisors to influence

that process (consumer bargaining power and the threat of substitute products)

2) The competitive behaviorof the broad industry, including wirehouses (competitive rivalry)

3) The consolidation in the industry (again, competitive rivalry)

4) The supplyof new advisors (the bargaining power of suppliers)

34 See Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors. Originally published: New York: Free Press, c. 1980.


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Figur 13. Portrs Fiv Forcs Affcting Comptitiv Stratgy

Source: Porter, Michael E., Competitive Strategy: Techniques for Analyzing Industries and Competitors. Originally published: New York: Free Press, c. 1980.

Economists like Porter distinguish between markets in which competitive behavior is strategic and

models of perfect competitionthe theoretical notion of a perfect market in which there is perfect

knowledge and information, and consumers can switch providers without cost. The words perfect

market can be misleadingin this theoretical model of competition, individual competitors end

up having no ability to influence the market. They can only choose how much service they will

supply but have no impact over the price of client behavior. The advisory industry will never be a

perfect competition marketfar from it. However, these economic models help us understand the

dynamics that will shape the industry in the next five years and, therefore, help us define the steps

that advisors should take to ensure success in the future.

RIAs Must Fram Consumr Dcisions

National TV advertising, newspaper ads, and other marketing are already bombarding consumers

with the message that their needs are defined by their generation (baby boomers), that they need

a big, stable companyto tackle their retirement, and that they should select a companywith a global

reach. Each and every one of these statements is framing the decisions that a consumer makes and

thus defining the terms of competition. Note current market share by affiliation model, as detailed

in Figure 14.

BargainingPower ofSuppliers

Threat ofSubstituteProducts

CompetitiveRivalry Within

an Industry

BargainingPower of

Customers

Threat of

New Entrants

NATURE OF INDUSTRY COMPETION


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Figur 14. RIAs Ma Up 14% of All Advisors

Source: Cerulli Associates, U.S. Cerulli Edge, August 2006.

RIAs need to find the forum and means to convey their own messages, which may include:

> Fulfilling client needs is not as simple as defining which generation you belong to; it depends

on an advisor spending the time to get to know you.

> Big often means diluted.

> Investing globally can be achieved without having offices in every city with a stock exchange.

The ability to strategically position a firm should not be taken for granted. Competition can result

in consumer expectations being so well-established that individual companies can only match the

expectations and compete on one or two limited characteristics without any pricing power or abilityto change the terms of service.

For example, in the tax preparation business, the relatively simple Form 1040 tax returns are most

often prepared with the aid of software packages, sometimes with the assistance of a real person, and

sometimes in a do-it-yourself model. In any case, the service expectations are well-set, and the service

characteristics are well-known to the consumer. Competition is focused on price, and opportunities

for differentiation are few. A small tax preparation practice that wants to focus on the 1040 market

will have to be tactically superior to the large national chainsmore friendly, better situated for

marketingbut will not have the ability to strategically influence the market. It can naturally search

for niches with less competition, but the number of niches is limited, and those can become crowded

as well.

REGIONAL

B/DS

BANK-OWNED

B/DS

RIA

ADVISORS

INSURANCE

B/DS

WIREHOUSE

ADVISORS

INDEPENDENT

B/DS

15,59516,892

43,008

57,432

72,691

110,027

NUMBEROFADVISORS


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Creating Customer Demand

The key to understanding the competitive future of the industry is to understand who creates

customer demand and how. In the advisory industry, before consumers will hire an advisor, they

have to walk the path from 1) understanding they have a need for advice, 2) self-identifying that

their current solution is not good enough, to 3) identifying the advisors who can potentially offer

a better solution. This process may be triggered by a retirement planning calculator; by a life event

such as inheritance, death, or divorce; or by a frustrating interaction with their current provider.

Once a problem is identified, the process is set in motion; the client goes through the following

general phases:35

A) Identify a problem or need. The problem or need might be dissatisfaction with their current

provider; realization that they are not as prepared for retirement as they would like to be; or

an interest in wealth management after speaking with a colleague or reading an article in a

magazine highlighting those services.

B) Consider the options. Whether consumers choose to act or not depends upon how serious they

perceive the problem to be.

C) Evaluate providers. Next, consumers typically compile a list of providers they believe can help

them address the need or issue, drawing on their centers of influence for possible referrals. This

is also where firm-level marketing typically beginsfocusing on prominence in the market of

potential providers.

D) Choose a provider. Finally, the potential client will meet with, evaluate, and select an advisor.

Figur 15. Choosing an Advisor Is a Four-Phas Procss

Source: Moss Adams LLP, 2007, drawing from ideas presented in Best, Roger J., Market-Based Management: Strategies for Growing Customer Value and

Profitability, 4th ed.

35 Adapted from Best, Roger J. Market-Based Management: Strategies for Growing Customer Value and Profitability, 4th ed.

NUMBEROFCONSUMERS

PHASE A PHASE B PHASE C PHASE D

Consumers recognizea problem (need fora retirement plan,better investmentstrategy, moreattention fromtheir provider, etc.)

Consider theoptions, whetheror not to act(how serious isthe problem?)

Evaluateproviders

Select aprovider


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RIAs can influence consumers at each of the crucial phases, A through C (Figure 15). During the

past five years, independent RIAs doubled in size and successfully took market share away from

wirehouses and banks, carried by their strength in helping potential clients acknowledge that they

have a problem that needs resolution (Phase A) and consider their options (Phase B). The difficult

markets of 2000, 2001, and 2002 caused much dissatisfaction with the brokerage industry (Phase A).

The mutual fund and wirehouse scandals amplified this opportunity (Phase A), and eliminated them

from the list (Phase B). The increasing recognition of commissions as a potentially conflicted method

of compensation added fuel to the fire (Phase B). Furthermore, financial planning and strategic asset

management helped advisors get into the list of referred or researched potential providers mentioned

in Phase B. Importantly, a high number of consumers recognized a problem (Phase A). Therefore,

the opportunity at the evaluation phase (Phase C) was significant.

From the perspective of an RIA firm, it may seem difficult to influence the initial decision. After all,

how can an RIA help consumers identify whether their investment strategy is adequate or if theircurrent advisor is doing a good job? Yet this is precisely the phase at which RIAs won many of their

new clients in 2000-2006. We believe that RIAs can and should participate in the definition of the

issues by doing the following:

> Help consumers identify problems. Books, web sites, tools, presentations, events, and one-to-

one conversationsany form of communication that helps consumers understand what their

needs are potentially initiates the search for or change of advisor. RIAs should be very active in

the process.

> Educate consumers about their niches. One of the strengths of RIAs is in identifying

niches and creating unique solutions for those niches. The first step, however, should be to

educate consumers in a niche that their needs are, in fact, different and cannot be tackled by

generic solutions. Much of the competition will be centered on baby boomer issues, but

not all consumer needs are defined by their age or generational characteristics. RIAs can help

consumers realize that in addition to baby boomers, they are also business owners, members of a

profession, supporters of a charitable cause, etc.

> Help the industry define its quality standards. This is where a lot of the lobbying effort is

directed in the case of the SEC exemption from registration for incidental advice. The strong

fiduciary statement pursued by the FPA and others created a very clear method for consumers to

diagnose this problem: their advisor is either an RIA or not, and therefore is either a fiduciary or

not. The exception creates a more complex picture and does not position RIAs to win clients atPhase A nearly as well.


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The past five years created a rich opportunity for RIAs at Phase A, and they took full strategic

advantage of it. However, the number of consumers likely to enter Phase A at all is decreasing, and

the factors that made RIAs stand out during the evaluation process at Phase C are diminishing.

Influencing the Frame of Evaluation

Phase A of the consumer path is not only an occasion for providers to make consumers aware of

the problem. It is also the time when consumer expectations are created, and whoever controls

the framework for evaluation of advisors will have significant sway over its results. For example, if

consumers come to expect that a good advisor will be a CFP, work for a large brand name firm, is

recommended by a large local law firm, has a DALBAR rating, and charges an all-inclusive (wrap) fee,

this is very much a definition that favors a specific type of advisornamely, large wirehouse firms.

A classic example of influencing the frame of evaluation is the discussion regarding the role of

investment performance in the overall evaluation of an advisor. If it becomes universally agreed upon

among clients that investment performance is not necessarily a good measure of their satisfaction

with a financial planning or wealth management advisor, then this will trigger relatively few events

in which clients change advisors as a result of poor performance. And vice versa: if the performance

continues to be a highly rated factor in the evaluation process, the criteria will tend to favor active

managers at the expense of wealth managers.

The ability of advisory firms to define their own criteria for evaluating their services is critical for

the collective success of the advice-focused firm. If advisory firms do not supply consumers with

a clear and easy-to-understand matrix for evaluating potential advisors, the industry will lose the

opportunity to utilize investment performance-driven options such as hedge funds, investment

managers, or self-directed models.

Much of the competition in the industry is local, and therefore, much of the race for influence over

consumers is local, too. While it may seem implausible for RIAs to compete in terms of consumer

influence with national firms, in fact, many of the larger RIAs are already rivaling the size of the local

branch offices of the national firms. This local dominance is critical.

Therefore the competition to be one of the top firms in the local market will be intense. It is claimed

that the top three competitors in a market for any service have twice as many revenue opportunities

as the number four firm. In practical terms, that means that if the number three firm in a market

gets 100 prospects in a year, the number four firm sees only 50. The drop-off is not gradual; it is

rather steep. That is why the competition for the top spots will be intense.


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Who You Ar Is Irrlvant, But What You Do Mattrs

Independent RIA advisors compete primarily with the local offices of the large wirehouse firms, the

large local trust companies, CPA firms, and banks rather than with each other. From an RIA firmperspective, competition should be thought of as between channels and affiliation models. RIA firms

rarely report competing with each other for market share. Rather, their new business comes from

clients, who are dissatisfied with their current providers, whether

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