blueprint project, phase ii presented at the lcuc, niagara-on-the-lake, ontario september 19, 2008...
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Blueprint Project, Phase II
Presented at the LCUC, Niagara-on-the-Lake, Ontario
September 19, 2008 Draft
- 2 -- 2 -Confidential Draft for Discussion Purposes Only
2
Blueprint Phase One: Strategic Priorities
Improved Economics Packaged Products Effective Distribution
Create a Stronger Foundation
Systematically improve the profitability of the business
– More proprietary product
– Higher profitability from proprietary product
– Clear mechanisms to share in system economics
• Develop a more focused, packaged offering
More packaged approach to product and advice
Drive more assets into proprietary product
Limit unintended cannibalization of other WM offers
• Develop best practices in managing the business
Advisors work for the credit union, not as a “broker”
Develop best practices in sales force management
More efficient back / middle office
Position Credit Unions in Wealth Management Space
• Develop multi period campaign to position credit unions as competitive, qualified wealth management providers
- 3 -- 3 -Confidential Draft for Discussion Purposes Only
3
Blueprint Phase One Recommendations
Current Positioning
Growth Opportunity
Business Model
Build Alignment
» Commit to sharing learnings from this project with other wealth management executives to build alignment to this direction
» Agree that the current positioning of the credit union system in wealth management is untenable as it fails to effectively serve the needs of our members and erodes the longer term competitiveness of credit unions
» Focus the strategy on achieving significant increases in both assets and profitability. Target a combined 4-5X growth in wealth management profitability, over the next five to seven years
» Concentrate on achieving growth through advisory channels that are integrated with the branch based retail delivery systems of the credit unions
» Do not focus on building standalone delivery models
- 4 -- 4 -Confidential Draft for Discussion Purposes Only
4
Blueprint Phase Two Scope
Improve Economics
Program Design
Business Model
Build Alignment
» Identify the key requirements from the perspective of participating credit unions (CEOs, WM team) from a packaged fund program
» Identify options to increase the manufacturing profits that accrue to distributors of the product
» Design the offering with efficiency in mind
» Based on best practices, input from wealth management executives (industry, credit union system) and Blueprint objectives, design an effective packaged fund program
» Outline potential business models and highlight key considerations (e.g. governance, costs, effectiveness)
» Reach agreement on an appropriate path forward
- 5 -- 5 -Confidential Draft for Discussion Purposes Only
Market Logic: Wraps / package are approximately 25% of the market today
• Fund wraps assets grew by $23B during the first half of 2007, accounting for 47% of the total asset growth in investment funds
• In 2006, over 120 fund wraps programs were offered by 40 providers – twice as many as were offered in 2001
* YTD June 2007Sources: IFIC – 2007 Year in Review. Investor Economics 2007 Fee-based Report
Fund Wraps Market Share by Asset Size – 2007* Historical Growth of Investment Fund Assets
$24
$91$114
$147
$429 $440
$550
$620
$0
$100
$200
$300
$400
$500
$600
$700
2003 2004 2005 2006
Ass
ets
($
Bill
ion
s)
Fund Wraps
Stand-Alone Funds
Total Investment Fund Market Size in 2007*: $800 Billion
Stand-Alone Funds78%
Fund Wraps22%
Fund Wraps Stand-Alone
3-year CAGR 30% 13%
- 6 -- 6 -Confidential Draft for Discussion Purposes Only
Market Logic: Packages are now the largest category in new sales
Fund Wraps Market Share by Net Sales – 2007* Historical Growth of Investment Fund Sales
$6
$11$11
$20
$0
$5
$10
$15
$20
$25
2006 2007A
sse
ts (
$ B
illio
ns)
Stand-Alone Funds**Fund Wraps
Total Investment Fund Net Sales in 2007*: $31 Billion
Stand-Alone Funds**
35%Fund
Wraps65%
* YTD June 2007**Also Includes funds in other managed assetsSources: Investor Economics 2007 Fee-based Report
Stand-Alone Fund Wraps
YOY Growth 90% 84%
- 7 -- 7 -Confidential Draft for Discussion Purposes Only
Market Logic: Packages are expected to growth at roughly twice the rate of stand alone funds
Source: Investor Economics, 2007 Household Balance Sheet ReportSource: Investor Economics, 2007 Household Balance Sheet Report
Projected Growth within Investment Funds
$789B
$1,252
$629
$625
$163
2006 2016
Funds in Managed AssetsStand-Alone Funds
(33%)
(67%)
$1,882B
(79%)
(21%)
CAGR: 2006 - 2016
Total: 9.1%
14.4%
7.2%
- 8 -- 8 -Confidential Draft for Discussion Purposes Only
Market Logic: Most of the packages sold by the leading players are proprietary (program run by the selling firm)
Source: IFIC April 2008 Statistics
Captive as a %of Total AUA 100% 95% 84% 88% 100% 37% 100% 64% 100% 86%
Breakdown of Fund Wrap Assets Among the Top-10 Fund Owners - 2008
$21.3
RBC
$18.3
TD
$16.6
IGM Financial
$16.4
Franklin Templeton
$9.1
Scotia
$5.9
Dynamic Funds
$3.9
ATB
Ass
ets
($ B
illio
ns)
$2.5$2.0 $1.9
CIBC AGF Manulife
• For captive funds, the asset manager is the same firm as, or a wholly owned subsidiary of, the fund manager
• Among Top-10 fund owners, an average 87% of packages have funds provided by captive investment managers
- 9 -- 9 -Confidential Draft for Discussion Purposes Only
Program Overview: The Core Structure for the Package Program has been Defined
Source: Deloitte analysis.Source: Deloitte analysis.
• Risk/return offered
• Efficient portfolio offered
• No lifecycle offering at this stage
• Roughly 6 asset classes for risk/return and 4 for efficient portfolio
• Approx. 5 investment advisors in total
• 1-2 with national brands (e.g., Franklin Templeton)
• MER range:
1.50 for efficient
2.35 for risk / return
• Low load structure
• Need to decide if Fundco finances upfront load
• No fees to client for transfers within program
• Use of independent investment consultant (e.g., Mercer)
• Broad, simple SRI screen (e.g., excludes investments in non-compliant sectors)
• Independent investment consultant to advise on rebalancing
Structure of Package Families
Underlying Investment
ManagementMER Levels Fee Structure
Other Design Elements
Recommended Core Elements of an Investment Fund Package
• Focus on the $10K-$100K asset segment
• Capacity to attract >$100K asset segments
Minimum Investment Required
1 2 3 4 5 6
- 10 -- 10 -Confidential Draft for Discussion Purposes Only
Overview: Most competitors offer a narrow range of packages
Source: Respective company websites
Number of Fund Families by Fund Administrator
111
22
3
44
1
2 2
3
0
1
2
3
4
5
RBC TD CanadaTrust
BMO NationalBank
CIBC CIInvestments
Fidelity Scotiabank ATB Dundee ING ManulifeFinancial
Nu
mb
er
of F
un
d F
am
ilie
s
Packages per Family
2-6 5 3-8 5-6 7-10 7-9 6-10 8 6 8 3 7
- 11 -- 11 -Confidential Draft for Discussion Purposes Only
Overview: The most common program is a risk / return structure
Sources: Fund owner websites, Globefund.com
Conservative
Balanced
Growth
Aggressive Growth
Maturity 2010
Maturity 2015
Maturity 2020
Index funds mix
PackagesFamiliesFund Owner
• Fund owners typically feature between 1 and 4 families of packages
• There are three core types of package families
Risk / Return
Lifecycle-based
Efficient Investment Instrument
Income
• Bank(e.g., RBC)
• Branded Asset Manager (e.g., Fidelity)
• End to End Player(e.g., Investor’s Group
• Credit Union(e.g., Credential)
- 12 -- 12 -Confidential Draft for Discussion Purposes Only
4Risk Profiles Based on Risk
Profiles
Overview of the proposed risk / return package program
Secure
Income
Conservative
Balanced
Growth
Aggressive Growth
6 Risk Profiles Based on Risk
Profiles
7Underlying Funds /
Portfolio
1 2 3
6
5
7
1112
4
108
15
9
1314
~5Investment Advisors
Typical market range: 2-11 Typical market range: 3-17 Typical market range: 1-8
Example
Source: Deloitte analysis.Source: Deloitte analysis.
16 17
1
4
3
2
5
1
Income
Balanced
Growth
Aggressive Growth
4Underlying Funds /
Portfolio
1Investment Advisor
Typical market range: 3-5 Typical market range: 4 Typical market range: 1
Canadian Equity
Canadian Bond
US Equity
Global Equity
1
Efficient Package
Risk/Return
Package
- 13 -- 13 -Confidential Draft for Discussion Purposes Only
Fund Custodians
Investment Advisors
Independent Investment Consultants
(Fees: 55 bps – 85 bps – Canadian large cap equity example)
Source: Deloitte Analysis.Source: Deloitte Analysis.
2
The program would leverage a range of investment advisors and other third parties. No specific partners have been selected as of yet
(Fees: $20K/portfolio and $25-$100 client account)
Branded Investment Advisors Specialist Investment Advisors
(Fees: 30bps – 50bps - Canadian large cap equity example)
(Fees: $20K for manager selections/$15K for portfolio allocation/fund)
- 14 -- 14 -Confidential Draft for Discussion Purposes Only
Comparative MER
Based on current packaged funds on the market, the following MER structure has been assumed for planning purposes4
Secure
Income
Conservative
Balanced
Growth
Aggressive Growth
Portfolios(Risk Profiles)
Suggested MER
1.85% 1.42%
2.25% 1.73%
2.30% 1.95%
2.40% 1.98%
2.50% 2.11%
2.60% 2.21%
Note: Analysis conducted by taking an average of competitive MER rates; a sample of risk/return packaged fund products offered by competitors including National Bank of Canada, RBC, TD Canada Trust, CI Investments, Dynamic Funds, and ATB was used; figures may be roundedSource: ATB Financial website. TD Canada Trust website. Deloitte Analysis.
Note: Analysis conducted by taking an average of competitive MER rates; a sample of risk/return packaged fund products offered by competitors including National Bank of Canada, RBC, TD Canada Trust, CI Investments, Dynamic Funds, and ATB was used; figures may be roundedSource: ATB Financial website. TD Canada Trust website. Deloitte Analysis.
Comparative MER
2.03%
2.28%
2.53%
2.83%
2.88%
2.93%
Average 2.35% 1.91% 2.70%
- 15 -- 15 -Confidential Draft for Discussion Purposes Only
The market is trending towards no or low load funds5
Option to Choose
Load Type90%
Front End Load10%
• The business model will most likely provide different load structures, including a deferred sales charge structure
Note: Analysis is based on a survey of competitive risk/return packaged fund products from 12 financial service providers, including Fidelity, Manulife Financial, CI Investments, Franklin Templeton, RBC, TD Canada Trust, CIBC, and ATB Financial. Data is approximate and directional in nature.Source: Deloitte analysis.
Note: Analysis is based on a survey of competitive risk/return packaged fund products from 12 financial service providers, including Fidelity, Manulife Financial, CI Investments, Franklin Templeton, RBC, TD Canada Trust, CIBC, and ATB Financial. Data is approximate and directional in nature.Source: Deloitte analysis.
Types of Fees Currently Offered on the Market
- 16 -- 16 -Confidential Draft for Discussion Purposes Only
The program will also include SRI screening, independence, and rebalancing6
• Independent investment consultant to advise on rebalancing
• The team recommends automated rebalancing performed on a quarterly basis
• The team does not recommend advisor-driven rebalancing
Rebalancing SRI ScreensIndependent Investment Consultant
• Participants to determine the extent to which SRI screens should be used
• The team recommends that a broad SRI screen be applied to filter investments in non-compliant sectors (e.g., tobacco)
• Third party such as Mercer or CIBC Mellon proposed
• Fund details and structure to be finalized by an independent investment consultant
• Use of independent investment consultant limits bias towards specific advisors or participating credit unions
- 17 -- 17 -Confidential Draft for Discussion Purposes Only
Pre-Tax Operating Margin ~20 – 60 bps Pre-Tax Operating Margin ~20 – 60 bps
Distribution
Operating Margin ~2 bps Operating Margin ~2 bps Operating Margin ~0-40 bps Operating Margin ~0-40 bps
Fund Management
Operating Margin ~18 bps Operating Margin ~18 bps
MER ~215 bps MER ~215 bps
Fund Expenses ~30 bps Fund Expenses ~30 bps Fees2 ~97 + 6 bps3 = 103 Fees2 ~97 + 6 bps3 = 103
Other Costs ~70 bps Other Costs ~70 bps
Distribution Cost ~97 bps2 Distribution Cost ~97 bps2
Cost ~24 bps Cost ~24 bps
Total Rev. ~20 + 6 bps1 = 26 Total Rev. ~20 + 6 bps1 = 26
Cost ~50-60 bps Cost ~50-60 bps
MER ~215 bps
Mgt. Fee ~185 bps1
Fund Expenses ~30 bps
MER ~215 bps
Mgt. Fee ~185 bps1
Fund Expenses ~30 bps
Broker-Dealer Distributor
=
Note: 1Includes management fees, administration fees and redemption fees. 2Includes trailer fees and 9 Bps of commission amortization. 3Represents “other” CAM revenueSource: Credential, “Industry Margin Analysis”, 2006. Wealth Management Blueprint Project Steering Committee Meeting, January 29th, 2008.
+
Mgt. Fee ~185 bps1 Mgt. Fee ~185 bps1
Current State Economics: The current model generates low manufacturing margin
Revenue to CUs:
~78-108 bps
Revenue to CUs:
~78-108 bps
Total Revenue ~60-90 bps Total Revenue ~60-90 bps
Current State
=
-
=
-
=
-
=
-
- 18 -- 18 -Confidential Draft for Discussion Purposes Only
Revenue from Investor (MER)
Revenue from Investor (MER)
Pre-tax Operating Margin ~110 bps Pre-tax Operating Margin ~110 bps
DistributionFund Management
Operating Margin ~88 bps Operating Margin ~88 bps
MER ~235 bps MER ~235 bps
Investment Mgt Fee ~28 bps Investment Mgt Fee ~28 bps
Mgt. Fees ~207 bps Mgt. Fees ~207 bps
Custodial Cost ~13 bps Custodial Cost ~13 bps
Distribution Cost ~104 bps Distribution Cost ~104 bps
Operating Margin ~2 bps Operating Margin ~2 bps Operating Margin ~20 bps Operating Margin ~20 bps
Cost ~24 bps Cost ~24 bps
Total Rev. ~26 bps
Total Rev. ~26 bps
Cost ~58 bps Cost ~58 bps
Broker-Dealer Distributor
= =
- -
235 bps
Future State Economics: The proposed structure would increase manufacturing margins
=
-
Infrastr. & Legal Cost ~2 bps Infrastr. & Legal Cost ~2 bps
Notes: 1No patronage or trailer fees received. Data presented applies 5 years after program launch. More details available in the Financial Model Assumptions section of the Appendix. Source: Deloitte Analysis. Interviews with potential suppliers.
Revenue to CUs:
~166 bps
Revenue to CUs:
~166 bps Fees Received1 ~104 bps Fees Received1 ~104 bps
Total Revenue ~78 bps Total Revenue ~78 bps
Future State
Risk/Return Package,Year 5 (80% of total)
- 19 -- 19 -Confidential Draft for Discussion Purposes Only
Key Issues: A number of key issues have been raised and addressed
• View that NEI should be one of the leading investment managers responsible for investing a significant portion of the overall mandate
NEI Participation as an Investment
Manager
Discussion Potential Resolution
• Select NEI to manage in the range of 25%+ of the overall portfolio
• This percentage is higher than NEI’s current share of managed assets for the system overall
Issue
• View that a nationally recognized investment manager(s) should be involved in the program, with material mandates
Need Nationally
Recognized Managers
• Recommended approach would have a combination of highly recognized managers (e.g. Mackenzie, Templeton) and quality managers known to investment professionals (e.g. Mawer)
• View that the program needs to be demonstrably well designed and unbiased so that advisors will be comfortable advocating for the program
Program Must be
Demonstrably Independent
• Recommended to engage Mercer or CIBC Mellon to act in an independent capacity to assist in the development and oversight of the program, on a fee for service basis akin to support provided to ATB
• View that the program needs to have an MER that is competitive with other leading programs (e.g. Templeton Quotential about 240 bps)
MER Must be Competitive
• Recommended MER is 2.35. Most of the feedback to date has found this to be a reasonable level but options to exist to have lower MER for higher minimums (e.g. $50K +)
- 20 -- 20 -Confidential Draft for Discussion Purposes Only
• View that multiple fund classes will be needed to accommodate tax efficient investors (e.g. corporate class) and enable different MER structures (e.g. higher minimums)
Need Multiple Fund Classes
Discussion Potential Resolution
• Ensure that a competitive array of fund classes to accommodate different advisor requirements (e.g. F class, tax class, corporate class)
Issue
• View that credit unions are in part differentiated on their commitment to socially responsible investing
Require an Appropriate SRI Screen
• Recommended that a broad SRI screen be applied that would prevent investment in defined sectors (e.g. tobacco)
• View that an objective investment track record will be required from the outset to sell the program
Need an Investment
Track Record
• Will require specific mandates to be selected from funds that are currently in operation vs. establishing a separate fund for this program
Key Issues: A number of key issues have been raised and addressed (continued)
- 21 -- 21 -Confidential Draft for Discussion Purposes Only
• Concern was raised that there may not be sufficient volumes, particularly if too broad a cross-section of credit unions were required to participate
Are there Sufficient
Volumes to Proceed
Discussion Potential Resolution
• Estimated volumes from the participating credit unions are $1.8Bn. Minimum threshold is likely $1Bn, which would imply meets thresholds at 50% of expectations
Issue
• Some credit unions strongly prefer a DSC approach and have geared their current economic model around this structure, at least for the near term
Need a DSC Structure as well as No / Low Load
• Can structure an option where a portion of future profits are “financed” by the proposed structure, with this class bearing the cost of such financing and asset retention risk
• The program would need to have sales support comparable to other well supported programs (e.g. Quotential, AGF, others)
Needs discovery questionnaire process
Package recommendation
Marketing brochures
Illustrations around potential investment outcomes, etc.
Need Effective Sales Process
Support
• Effective sales process tools (e.g. needs discovery, package recommendation), etc. will need to be built along with supporting sales material
• Most likely mirroring competing offers
• Choices around the extent to which such support would be sought from a common broker dealer (Credential) and thereby available on a sole source basis through that broker dealer
Key Issues: A narrow set of potentially contentious issues have also been largely addressed
- 22 -- 22 -Confidential Draft for Discussion Purposes Only
• General acceptance amongst the participants that the investment shelf needs to be materially shortened
• General acceptance again of the need to be more directive about selling “recommended” packages
• Concern about the pace at which this transition can be made, given the different stage that various credit unions are at
Are Credit Unions
Committed to Moving to a
“Short Shelf” / Proprietary Packaged
Model
Discussion Potential Resolution
• The participants should consider the extent to which it will be appropriate for a common entity, such as the broker dealer, to provide practice management support / best practices training to aid credit unions who are further behind in this transition
Issue
• Concerns raised that the costs to collaborate may outweigh the benefits
• Concerns that in the process of seeking consensus, too many trade-offs will be made thereby eroding the effectiveness of the program
• Concerns that the governance model may not turn out to be sufficiently enduring
Can System Participants Effectively Managed a
Shared Program
• Will need to spend sufficient time in establishing an effective governance model from the outset and limit the extent to which this agreement is re-opened
• Can delegate a larger portion of the on-going management of the program to an independent third party such as Mercer, CIBC Mellon, others
• Can delegate the governance of the program to a subset of the most significant volume contributors to the program who will act on the system’s behalf
?
?
Key Issues: The key issues that remain are affirming commitment to a “short shelf” business model and governance
- 23 -- 23 -Confidential Draft for Discussion Purposes Only
• Various credit unions leverage their combined volumes to negotiate higher level of support from select, common fund companies
Target modest near term gain (e.g. 20 to 30 bps) in return for volume commitments
Increase bonuses as shared volumes grow
Negotiate additional support
• A few credit unions establish and run the program
Determine role of system providers (NEI, Credential) and degree of dealer exclusivity
Responsible to each other for effective governance
Enable other credit unions access to defined program
Status Quo Buying GroupLed by a Few Credit
Unions
• Each credit union makes its own value maximizing decision
• Earn a portion of the manufacturing profit through the NEI patronage dividend
• Negotiate own deals with preferred fund companies for additional support / financial incentives
• System suppliers take the lead in managing a program acceptable to key credit union stakeholders
Manage the program in return for specific commitments
Adopt an appropriate profit sharing model
Fund and manage the program, with input from credit union customers
Program Run by System Suppliers
The study participants are considering what approach makes the most sense to proceed against, balancing governance complexity and time to market needs
Illustrative Options