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    MAKING CHOICES, FINDING GROWTH The State of Retail Wealth Management 8th Annual Report The State of Retail Wealth Management 1

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    Financial advisors at North American wealth management firms grew revenues to a record high in 2018. Remarkably, they did so without the market performance tailwinds that have propelled them for the past several years. They did so by attracting more new clients and by increasing their services to existing clients. Many advisors found growth by managing the demographics of their book and by adding more ‘Next Gen’ clients—that is, clients born after 1965. This edition of our annual State of Retail Wealth Management looks critically at several aspects of growth. How have so many advisors been successful at achieving growth? What roles do demographics and pricing play? What threats lie ahead for both advisors and executives? What actions can firms take to achieve long-term, sustainable growth? This report is drawn from PriceMetrix data collected from more than 25 wealth management firms in North America, and includes detailed positions and transactions information representing 12 million retail investors and $6 trillion in assets. Because data is refreshed continuously, PriceMetrix offers an unmatched view into the behaviors and characteristics of financial advisors and insights into how decisions affect advisor growth and client outcomes. Unless otherwise noted, all data is reported as of December 31, 2018. 2018 Highlights ‹ Record high advisor revenue despite a market-driven drop in assets. ‹ Material improvement in the number of new client relationships established per advisor. ‹ Continued growth in fee assets and revenues as well as deeper client relationships. ‹ Early signs of stabilization in aggregate price levels, though significant variation persists. ‹ Emergence of both Next Gen clients and Next Gen advisors as catalysts for growth. The State of Retail Wealth Management 3

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    Advisors Found Ways to Grow Despite Market Performance After several years of growth largely fueled by market performance, assets managed per advisor declined 7% in 2018 to $99 million. Despite this asset decline, revenues continued to grow, up 6% in 2018, and now sit at a record $694,000 per advisor. Median Assets per Advisor (Millions) Median Revenue per Advisor (Thousands) $106 $694 $99 $655 $92 $591 $583 $87 2015 2016 2017 2018 2015 2016 2017 2018 More and Deeper Client Relationships One of the ways advisors maintained revenue growth, even when faced with more turbulent markets, was through an increased focus on new client relationships. In 2018, advisors opened 8.1 new client relationships, up from 7.6 in 2017 – a clear spike over recent years. New Household Relationships per Advisor In addition to adding more new client relationships, advisors continued 2015 2016 2017 2018 a recent trend of deepening existing relationships. In 2018, several 7.7 7.5 7.6 8.1 key relationship depth indicators hit record levels: the proportion of multi-account households, median accounts per household and the percentage of households with retirement accounts. These important indicators, all linked to client retention 1, point to continued improvement in the depth and quality of advisor/client relationships. 2015 2016 2017 2018 Proportion of Multi-account Households 58% 59% 61% 62% Median Accounts per Household 2.7 2.8 2.9 3.0 % of Households with Retirement Accounts 65% 67% 70% 71% 1 4 The State of Retail Wealth Management PriceMetrix Stay or Stray, 2014.

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    Growth Driven by Recurring Revenue 2018 Year-over-Year Revenue Growth by Account Type Another key driver of advisor revenue growth was the Fee Accounts continued proliferation of fee-based accounts. Revenues from fee accounts grew by 17% in 2018 over 2017, while +17% Revenue Yield revenues from transactional accounts declined by 5% year over year. Revenue growth was further propelled by the fact that fee assets are more productive than transactional assets. Average revenue yield (revenue over 91bps assets) for fee accounts was 0.91% in 2018 compared to 0.37% for transactional accounts. Revenue Yield 52% of client relationships now contain at least one fee- based account, up from 31% in 2015. Fee-based revenue now represents a record two-thirds of advisor revenue, and - 5% 37bps fee-based assets grew from representing 33% of all assets Transactional Accounts in 2015 to now representing 47% of all advisor assets. 2015 2016 2017 2018 Fee-based Revenue 49% 54% 63% 67% Fee-based Assets 33% 37% 46% 47% Percentage of Households with Fee Accounts 31% 36% 46% 52% 2018 Year-over-Year Revenue Growth by Advisor Disparity in Growth Performance -7% 26% While the median revenue growth rate for advisors was an encouraging 6% year over year, there is a wide gap in growth performance. The top quartile of advisors grew by an impressive 26%, while the bottom quartile experienced a year over year revenue decline of 7%. There is 4 3 2 1 significant value to be unlocked by firms that can identify and replicate the behaviors of top performers, across their entire advisor base. Bottom Top 2 2 Quartile Quartile 2 Based on revenue growth The State of Retail Wealth Management 5

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    The Next Generation of Wealth: The Youth Movement is Taking Hold Clients born after 1965 (predominantly 2015-2018 Asset Growth generations X and Y) now represent 21% of Compound Annual Growth Rate wealth management clients, up from 16% in 2015. While this may still seem like a small proportion of overall clients, consider the fact Next Gen Clients that the average assets of these clients have grown by 6.1% over that same time period, compared to 3.5% for those born before 1965. 6.1 % Older This growth outperformance can provide a Clients boost to advisors who are choosing to work with Next Gen clients. 3.5% Proportion of Total Client Relationships 2015 2016 2017 2018 Next Gen Clients (born after 1965) 16% 19% 20% 21% Older Clients (born 1965 or before) 84% 81% 80% 79% Advisors vary in their willingness (and/or ability) to attract Next Gen clients. Advisors in the top-quartile have 37% of their clients born after 1965. For bottom-quartile advisors, the figure is 12%. Interestingly, the two advisor groups have similar revenues on average, but the advisors with younger books are growing at a faster rate than those with older books, reinforcing the impact that Next Gen clients can have on growth. Wealth management leaders will need to deeply understand the product and service preferences of Next Gen clients, to adapt and ensure they can continue to attract these important clients in the years to come. Bottom 25% Top 25% of Advisors 3 of Advisors 3 Percentage of Clients that are ‘Next Gen’ 12% 37% Median Advisor Revenue $688K $686K 2018 Year over Year Revenue Growth 8% 12% 3 6 The State of Retail Wealth Management Based on percentage of clients born after 1965

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    Average Advisor Age 56.4 56.5 Another indicator that client demographic changes are 55.9 55.3 really taking hold is that, for the first time in several years, the (asset-weighted) average client age actually declined, an encouraging sign indeed for the future of the North American wealth management industry. Average Asset Weighted Client Age 2015 2016 2017 2018 67.6 67.7 67.6 66.6 Along with the emergence of Next Gen clients, advisors themselves are showing evidence of a youth movement. After a multi-year trend in which average advisor age increased by 6 months per year, in 2018 the average age stabilized. 2015 2016 2017 2018 The most common way for new advisors to enter Teams with Next Teams without Next Gen Members Gen Members the wealth management industry is by joining an established team: 68 percent of advisors under Percent of Teams 33% 66% 40 years of age work as part of a team. Working as part of an established team allows new Revenue Growth 11% 9% advisors to build experience and expertise. And the team benefits as well: teams with Next Gen New Clients 8.3 7.7 advisors grow at a faster rate, add more clients, and lose fewer clients than their counterparts. Lost Clients 8.1 8.8 The State of Retail Wealth Management 7

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    Is Price Stabilization on the Horizon? In recent years, there has been a precipitous decline Fee Rates for households with managed in the price charged for wealth advice. Increased assets of $ 1 million to $ 1.5 million transparency brought about by regulatory changes 1.16% 1.13% and new competitive entrants continue to challenge 1.08% 1.06% the traditional advice model. While some advisors have responded by extending the breadth and depth of their services, others have chosen to lower their prices. In 2018, fee pricing continued to decline; however, the rate of decline slowed. For households with $1 million to $1.5 million invested, fee account pricing dropped 2 bps (from 1.08% in 2017 to 1.06% in 2018), compared to a 2015 2016 2017 2018 drop of 5 bps the previous year. Price for Wealth Advice 4 In the current dynamic pricing environment, with some advisors lowering prices while others are maintaining or even raising them, a wide range in price levels exists. For that same household segment (those with $1 million to $1.5 million in assets), the top 10% of clients (based on Bottom Decile 5 Top Decile 5 rate paid) pay 1.40%, while the bottom 10% pay 0.73%, or half as much as the top 10%. 73 basis points 140 basis points 4 For households with $1 million to $1.5 million in managed assets 5 Based on fee rate paid For some, this wide disparity in prices might signal instability. But when we look at the attrition rates of both the top- and bottom-priced clients, we see higher client attrition rates for those that pay a lower rate. In 2018, 3.2% of clients that were priced in the bottom decile left their advisor, compared to 2.2% of clients priced in the top decile. Clearly, advice in wealth management is not a commodity. Even today, when pricing is more transparent than ever, some clients are just as satisfied paying double what others pay. Premium propositions, with premium price tags, resonate just as well as cheaper ones. The challenge for advisors (and the firms they work for) is to ensure that the value they deliver aligns with the price they charge. 8 The State of Retail Wealth Management

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    ‘Enough’ – An Emerging Threat to Future Growth Many of the characteristics we’ve outlined highlight Percent of Assets Controlled by Top Producers 6 positive growth trends in the wealth management 26.4% industry. We’ve seen deeper relationships, more new 24.4% relationships, more recurring revenue, and more Next 21.1% 21.3% Gen clients and advisors. Clearly, advisors are making choices that are helping them scale more effectively and grow faster. One of the results of more advisors finding the right growth formula is that the industry is seeing more ‘big producers.’ The percentage of FAs who gross more than 2015 2016 2017 2018 $2 million in production has grown from 6.1% in 2015 to 8.4% in 2018, and the assets controlled by these top producers have increased from 21.1% to 26.4% in that same time period. However, with more big producers than ever before, firms are more exposed to one of the biggest threats to growth 6 Large and Large and – the size of advisors themselves. When advisors achieve Growing7 Stagnant8 a certain size, many choose to stop growing – in essence, they achieve “enough.” If not managed, this inertia can Population 32% 68% have a dramatic impact on the performance of wealth management firms overall. Revenue $3.0M $2.7M To delve deeper into this issue, we look at top producers, Revenue Growth Rate 14% 8% and profile those who continue to grow, and those who achieve “enough.” Advisors who are large, and who Fee Revenue Percentage 66% 62% continue to grow, have a higher proportion of revenues from fees, service larger clients, and charge higher rates. Even at Overall Fee Rate these very large book sizes, advisors can make decisions 0.84% 0.82% that will lead to continued growth. Perhaps the bigger challenge for firm executives is managing the desire for Average HH Assets $2.4M $1.7M continued growth amongst their top producers. 6 Greater than $2 million in annual gross production Most wealth management firms spend a disproportionate 7 Year over year growth in assets 8 amount of resources to retain large advisors. Higher payout Year over year decline in assets rates, reward clubs, titles, and many other components of compensation are directed toward high-revenue producers. To avoid the drag on growth that can come from inertia and the “enough” phenomenon, executives need to adjust these reward programs to ensure that they encourage sustainable growth. The State of Retail Wealth Management 9

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    By all accounts, 2018 was a terrific year for North American financial advisors. They deepened existing client relationships. They added more new clients. They grew revenues despite emerging instability in market performance. Two specific areas that have a profound impact on advisor growth are pricing and client demographics. Each can be a driver of growth as well as a drain. With respect to pricing, some advisors view emerging digital competitors as an opportunity to highlight their added value, while others view them as a threat and lower their price in response. Similarly, advisors who are deliberately making connections with younger clients (while continuing to service clients across different generations), are seeing faster growth. Most importantly, advisors are learning that both pricing and demographics are not events that are happening to them, but rather forces that they control, and that they can leverage to unlock breakaway growth. The reward for firms that help their advisors make informed choices about pricing and demographics is worth a substantial investment. Firms can impact their revenue growth rate by 3 to 5% by encouraging advisors to pursue new Next Gen client relationships. Programs that help advisors price with confidence can add 5 to 7% in additional revenues. Just as pricing and demographics are choices, so too is growth itself. For wealth management firms to grow, they need their advisors to know how to grow, and they also need their advisors to want to grow. That means finding the right advisors, investing in their capabilities with practice management analytics and coaching, and shifting the compensation model from rewarding the results of growth to rewarding the drivers of growth. 10 The State of Retail Wealth Management

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    For more information on this research, contact: Patrick Kennedy Chief Customer Office at PriceMetrix 416-955-0514 or patrick.kennedy@pricemetrix.com 12 The State of Retail Wealth Management

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