©2014 Morningstar, Inc. All rights reserved.

Scott BurnsGlobal Head of Asset Management Solutions

Thriving in a Post-DOL Rule World

Trends – The Move from Commission to Fee-Based Advice is Driving Everything

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g The changing landscape of fund distribution is in full swing in the US and growing Internationally

gWe can now safely say from the US experience that this shift creates the following changes in investor behavior

/Costs matter, a lot – expect flows into indexes and ETFs and “clean/institutional” share classes

/Advisors and retirement plans look for more packaged solutions as they reframe their value propositions – expect growth in Multi-Asset, Fund-of-Funds and “Solutions”

/Advisors will seek to de-risk portfolios – expect less direct equities and more alternatives and fixed income

/Robo/Automated Advice will grow – advisors will need to scale smaller accounts

gAll of these are the rational response of advisors adopting a basis points on assets business model

Global Flow Trends

Annual Flows by Global Category Group

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Global Flow Trends

-400

-200

0

200

400

600

800

1,000

1,200

1,400

1,600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD

Global Estimated Net Flows by Broad Category Group, USD Bil

U.S. Equity World ex-U.S. Equity Fixed Income Allocation Alternative Commodities Other

Estimated Net Flows by Region and Category, 2015

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Global Flow Trends

Source: Morningstar Direct Asset Flows. All figures in USD billion unless stated otherwise. © Morningstar. All Rights Reserved.

Indexing Continues to Dominate in US, On the Move Elsewhere

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Global Flow Trends

(300)

(200)

(100)

0

100

200

300

Equity Fixed Income Equity Fixed Income Equity Fixed Income Equity Fixed Income

United States Cross-Border Europe Asia

1-Year Net Flows, Major Regions, Index versus Non-Index, USD Bil

Index Non-index

The Move to Institutional Shares is a Long-Term Trend in U.S.

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Global Flow Trends

-150

-100

-50

0

50

100

150

200

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Annual Net Flows for Active Funds, USD Bil

Lowest-cost quintile

Quintiles 2 through 5

% of Flows 1990 - 2002 2003 - 2015

Lowest Cost Quintile 39% 93%

Quintile 2 to 5 61% 7%

Preference for Low-Cost Funds is Accelerating in the U.S. in the Core

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Global Flow Trends

2015 Asset Flows

Fastest Growing Fund Family in U.S. is Really a Wealth Platform!

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Global Flow Trends

Alternatives and Gold Funds Outpacing the Field

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Global Flow Trends

2015 Asset Flows

9.4%

3.3%

6.1%

3.0%

0.1%

-12.4%

24.7%

11.8%

0.4%

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

Tax Preferred

Property

Money Market

Fixed Income

Equity

Convertibles

Commodities

Alternative

Allocation

Global Organic Growth in Assets in Last 12 Months

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Funds of Funds Continue to Drive Growth in Allocation Category Group

Source: Morningstar Direct, Allocation Funds including Funds of Funds, U.S. Domiciled Mutual Funds and ETFs. Data as of August 2015

0

1,000

2,000

3,000

4,000

5,000

6,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Total Global Assets in Allocation Funds, USD billions

Non-FoF Target-Date Non-FoF Non-Target-Date FoF Target-Date FoF Non-Target-Date

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Strong Recent Flows into Multi-alternative and Managed Futures Categories

Source: Morningstar Direct, U.S. Mutual Funds and ETFs, excluding Funds of Funds. Data as of December 2015.

U.S. Alternative Category Flows, USD Bil

-20

-10

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Long/Short Equity Market Neutral Multialternative Currency Trading Managed Futures Volatility

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Growth in Alternatives Stagnated in the Last Year

Source: Morningstar Direct, U.S. Mutual Funds and ETFs, excluding Funds of Funds. Data as of December 2015.

Total Assets in Alternative Mutual Funds and ETFs, USD Bil

0

50

100

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Volatility Currency Managed Futures Market Neutral Multialternative Long/Short Equity Trading

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Target-Date is Basically a U.S. Only Category

Source: Morningstar Direct, Worldwide Mutual Funds and ETFs

-100

-80

-60

-40

-20

0

20

40

60

80

Allocation Target-Date Allocation Target-Date Allocation Target-Date Allocation Target-Date

Asia Cross-Border Europe United States

Allocation and Target-Date Flows by Structure and Region, USD billions

Funds of funds Funds

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Incumbent Players Currently Dwarf the Entire Robo-Advisor Industry

Client Assets $trillions.

Robo-Advice

0.0

0.5

1.0

1.5

2.0

2.5

3.0

BAC SCHW MS AMTD RJF ETFC ENV SF FNGN WETF Robo

Source: Company filings, Corporate Insight

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The Wealth Manager Value Proposition Must Align With Client Needs

Source: Morningstar. For Illustrative Purposes Only.

For Financial Professional Use Only. Not for Public Distribution

Discount Brokerage Robo-Advisor Cyborg-AdvisorFull-ServiceWealth Manager

Client DIY Trader & DIY Long-term Investor

Mass Affluent Mass Affluent High-Net-Worth & Ultra HNW

Service Low Cost Trade Execution

Trading Tools

Investment Information

Low Cost Asset Allocation

Low Cost Asset Allocation

Electronic Communication

Basic Financial Plan

Personalized Asset Allocation

Human Relationship

Holistic Goal & Financial Planning

Product Access (IPOs, Alternatives)

Loans

Insurance

Tax Optimization

Investment Alpha

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View Investing More Holistically -- Household Investor Profile Framework

Risk Profile

Investment Attitudes

Risk Tolerance

Inve

stin

g Ex

perie

nce

Ris

k Pr

efer

ence

Savi

ng P

refe

renc

e

Risk Capacity

Time Horizon

Current Spending

Inco

me

Expe

nses

Future Spending

Goa

ls

Prio

ritie

s

“Total Wealth”

Liquid Illiquid

Fina

ncia

l Cap

ital

Hou

sing

Cap

ital

Pens

ion

Cap

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Hum

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How Will Big Data Transform Your Approach to Product Construction?

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Total Wealth Approach

The Total Wealth Approach encompasses the methodologies Morningstar applies to help investors understand, plan for, and meet their future spending goals going beyond the realm of Financial Capital.

Tomorrow’s Team: Defined Processes and Consistent, Compliant Materials

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The Sales Team of Tomorrow

The sales team of tomorrow has one point of contact for content strategy, creation, and distribution, while compliance has oversight into the entire process. Morningstar DirectSM, combines solutions and aligns teams firm-wide.

When you engage advisors and investors online and help them solve a problem, you can begin to nurture them as leads.

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Raising AUM by Leveraging Digital Tools

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Morningstar Solutions

Profile: Large Asset Manager (Top 30)

Business Challenge: Highlight benefits of their funds within portfolios

Solution: Morningstar Portfolio Analysis Capability

• Offered to registered reps

• Portfolio X-Ray, analytics, metrics on performance, holdings, geographic exposure, portfolio risk

• Usage statistics gathered and linked to their CRM

• Client uses this as a basis for follow up calling campaigns

Result: Almost 1,200 illustrations run in one month; 24% converted to actual sales; $18.2 million in added AUM in one month (Feb. 2016)