The State of Managed Accounts

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The State of Managed Accounts

• NICSA Managed Accounts Conference
• September 25, 2003

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Cerulli Associates Managed Accounts Research

• Decade-long pioneering coverage and analysis
• Proprietary database tracking key attributes from
  more than 300 asset managers and sponsor
  programs
• Conduct more than 200 in-depth interviews
  annually with senior management

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Agenda The State of Managed Accounts

• Industry Overview
• Distribution Channel Update
• Asset Manager Strategies
• Platform Development

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Industry Overview
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Sponsors Providing Advisors with Range of
Managed Account Offerings
827 Billion as of 1H 2003
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Source Cerulli Associates
6
Total Managed Accounts Have More than Doubled
Since 1998
Total Managed Accounts to Top 1.8 Trillion by
2007
827 Billion
769 Billion
741 Billion
722 Billion
508 Billion
323 Billion
Source Cerulli Associates
7
Wirehouses Have Embraced Concept Helping to
Lead Industry Shift
Sources Company Reports, Cerulli Associates
8
And Advisors Expect Heavy Future Focus on
Managed Accounts (IMCA Membership)
Sources Investment Management Consultants
Association, Cerulli Associates
9
Separate Account Consultant Programs are in the
Spotlight
Includes only Third-party Separate Account
Consultant Programs
Source Cerulli Associates
10
..And Gathering Strong Net Cash Flows,
Especially vs. Mutual Funds
Billions
Source Cerulli Associates
11
Growth of Separate Account Programs Attracting
Range of New Market Entrants
Separate Account Consultant Programs
Source Cerulli Associates
12
And Asset Managers are Responding
10 Largest Asset Mgt Organizations Control 50 of
Market
2Q 2003 Manager AUM Share of Broker/Dealer
Separate Accounts (433 bn)
Source Cerulli Associates
13
Individual Managers on Separate Account
Consultant Programs
Third-party Separate Account Consultant Programs
2Q 2003 Individual Manager AUM of Consultant
Program Assets (330 B)
Source Cerulli Associates
14
Expanding in Foreign Lands International
Managed Accounts
260 billion as of year-end 2002, 80 mutual fund
advisory
Source Cerulli Associates
15
Distribution Channel Update
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Managed Account Channel Scorecard
16
Sources Company Reports, Nelsons Information,
Cerulli Associates
17
Total Managed Accounts NYC Brokerages Dominate
Marketshare
Top 2 Command 47
2Q 2003 Managed Accounts Marketshare
Source Cerulli Associates
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Separate Account Programs Top B/D Sponsors
NYC brokerages remain tops, but collective share
eroding 1-2 per year
2Q 2003 Separate Account Consultant Program
Marketshare
18
Source Cerulli Associates
19
Proprietary Asset Managers Ramping-Up Efforts
Percentage of Total Broker-sold Separate Accounts
at Broker/Dealer
19
Source Cerulli Associates
20
Third-Party Vendors Helping to Grow Managed
Accounts
TPV Asset Share By Segment

• Third-party vendors assisting resource and
  time-constrained B/Ds
• e.g., FundQuest, Brinker, SEI, EnvestnetPMC,
  Morningstar, London Pacific Advisors/SunGard
• Clearing and securities processing firms offering
  managed account platforms
• e.g., BoNY/Lockwood, Pershing,
• National Financial, US Clearing,
• Southwest Securities, PFPC

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Source Cerulli Associates
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Vendors
Vertical Platform Providers vs. Specialist
Providers?
21
Sources Cerulli Associates
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Asset Manager Strategies
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Profit Margins Converging
Distribution Rules the Day
Pretax Profit Margins
Sources Putnam Lovell, Merrill Lynch, Cerulli
Associates
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Operationally Inefficient Marketplace
Source Cerulli Associates
25
Portfolio Accounting and Trading Systems Decisions
Source Cerulli Associates
26
Operational Benchmarks Costs of Operations at
Parity with Sales Marketing
Cost of Operations Underestimated by Industry
Source Cerulli Associates
27
Management Fees on the Decline
BLENDED management fee for Subadvisory and Open
Programs
Wirehouse subadvisory management fees from 45-55
bps a few years ago to below 40 currently
Source Cerulli Associates
28
Deteriorating Economics Reduced Programs
Asset Manager Sample Average Program
Relationships

• Sample of 10 managers in the business since 1994,
  26B AUM currently
• Firms shed a net 3.8 sponsor relationships each
  2000-2002
• However, the firms added average of 2.4 new
  programs
• Thus, managers in the sample shed greater than 6
  program relationships each

Source Cerulli Associates
29
Operational Benchmarks Breakeven and
Profitability
Gross Profit Margins are 20 in the Average
Growth Case but Can Top 40 Under Aggressive
Growth Plans
Assets
Revs/Exp
Source Cerulli Associates
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Emerging Solution
Operations Outsourcing
Future?
7. Trading
Log-On
Outsourcing Opportunities
3rd Party System
6. Portfolio Administration
5. Performance Reporting
4. General Account Administration
3. Reconciliation
2. Marketing Fulfillment
1. Account Opening and Closing
Source Cerulli Associates
31
Asset Manager Salesforce Issues Becoming More
Complicated
Managers grappling with balancing coverage and
economics
Source Cerulli Associates
32
Holding Company Format WillBecome More Popular
to Gain Scale
Top 10 Separate Account Asset Manager Holding
Companies 2Q 2003 ( millions)
Note Figure in parentheses indicates affiliates
active in sponsor programs
Source Cerulli Associates
33
CA Identifies Three Major Holding Company Models
Central in Spotlight
Source Cerulli Associates
34
Platform Development
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The Unified Managed Account (UMA) will be the
Next Major Program Evolution
Source Cerulli Associates
36
As a Result, MAGs Will Continue to Gain Both
Firm and Industrywide Prominence

• Trend away from operating silos. Individual
  program offerings converging into one Fee-Based
  Unit
• Single point of management oversight
  
• Centralized research
  
• Shared infrastructure (operations, marketing,
  sales support)
• Unified Managed Account (UMA) offerings
  
• Asset Mgrs Single entry, may alter negotiating
  power with B/Ds
• Vendors Services must fit broad range of
  offerings
• Distributors Greater managed accounts sales.
  Export non-U.S.

Source Cerulli Associates
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Platform Support is Crucial Spotlight on Sales
Marketing
Sponsor Managed Account Group (MAG) Division of
Labor
Source Cerulli Associates
38
Centralized Platform MAGs Will Increasingly Be
Leveraged Across Global Affiliates
Example CitiGroup
Consulting Services Group (MAG)
Managed Account Platform Product
Development Money Manager Due Diligence Marketing
Sales Support Equity Research (In-house
Third-Party)
Source Cerulli Associates
39
Next Step Integrated Financial Planning
Financial Status Assessment
Customer Profiling Cash Flow Analysis, Net Worth
Assessment
Assets
Liabilities
Credit Card Balances (installment payments)
Bank Accounts (checking/savings)
Individual Retirement Accounts
Other Loans
Mortgages
Brokerage Accounts
Other Expenses
401(k) Accounts
Real Estate
Trust Accounts
Pensions Annuities
Source Cerulli Associates
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Appendix
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Questions
Paul A. Fullerton Associate Director (617)
437-1098 x118 pfullerton_at_cerulli.com Cerulli
Associates 575 Boylston Street Boston, MA
02116 P [phone] F [phone] www.cerull
i.com
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CA Research and Consulting Services
Independent research-based analysis focusing on
investment product distribution trends
43
CA Managed Accounts Offerings
44
Managed Accounts
Cerulli Segment Definitions

• Separate Account Consultant Programs
• Programs by which asset managers manage
  investors assets in discretionary separate
  accounts. Account minimums are typically
  100,000 to 250,000 and up. A bundled
  asset-based fee (often 2.5 to 3 before
  breakpoints and discounts from negotiation)
  covers money management, trading, and custody,
  though sometimes this fee may be paid via
  directed brokerage commission. Third-Party
  Manager Programs offer separate account asset
  management from multiple investment firms and are
  typically sponsored by a broker/dealer.
  Proprietary Manager Programs may be sponsored by
  an asset manager affiliated with a brokerage
  organization, and offer proprietary asset
  management options only.
• Mutual Fund Advisory Programs
• Programs designed to systematically allocate
  investors' assets across a wide range of mutual
  funds. Services include client profiling, account
  monitoring, and portfolio rebalancing. An
  asset-based fee is charged instead of
  commissions. Account minimums typically range
  between 10,000 and 50,000. There are three
  types of programs packaged, hybrid, and
  openranging from least to most flexible.
  Categorization is determined by range of product
  offered and level of rep influence.

Source Cerulli Associates
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Managed Accounts

• Rep as Portfolio Manager
• Arrangements in which reps act as money managers
  for their clients by taking full responsibility
  for selecting a portfolio of securities,
  sometimes from a research departments
  pre-approved list. Reps go through rigorous
  internal training to qualifyonly a small number
  are approved to participate in program. There is
  often both a senior- and junior-level rep version
  of the program. Clients are charged an
  asset-based fee for their services.
• Fee-Based Brokerage
• Nondiscretionary programs that offer clients a
  flat, asset-based fee for all trading activity
  instead of a commission for individual trades.
  These programs are not typically targeted to day
  traders, and are increasingly incorporating
  financial planning and advisory elements. With
  fees ranging between approximately 1.10 to 1.50
  of assets, these programs offer both mutual funds
  and individual securities, with stocks being the
  most common holding.

Cerulli Definitions
Source Cerulli Associates