the rebranding of brinker capitalinfo.brinkercapital.com/rs/brinkercapital/images/day1...risk brings...

For financial advisor use only at the Brinker Capital Investment Management Forum.Brinker Capital Inc., a Registered Investment Advisor.

Industry InsightsJOHN E. COYNE, III, Vice ChairmanBRENDAN McCONNELL, Chief Operating Officer

ideas. discipline. outcomes.

Investment Management Forum 2015

2For financial advisor use only at the Brinker Capital Investment Management Forum.Brinker Capital Inc., a Registered Investment Advisor.

Industry Trends

Active vs. Passive

Goals-Based Wealth Management - Behavioral Finance

Building business for multiple generations


Industry Trends

Active vs. Passive




2014 Was a Good Year for Passive

Percent of Managers in Lipper Universes Outperforming their Index in 2014

Source: Fact Set.


Cost Has Been an Appeal for Passive Investing

Source: Morningstar and Vanguard, 12/31/13. Vanguard calculations, using data from Morningstar. All Mutual funds in each Morningstar category were ranked by their expense ratios as of

12/31/13. They were then divided into four equal groups, from the lowest-cost to the highest-cost. The chart shows the ten-year annualized returns for the median funds in the lowest-cost and

highest-cost quartiles. Returns are net of expenses, excluding loads and taxes. Both actively managed and indexed funds are included, as are all share classes with at least ten years of returns.

Average Annual Returns Over The Ten Years Through 2013


Tax Efficiency Has Also Increased Demand for Passive

Index Funds Have Lower Tax Costs Than Actively Managed Funds

Morningstar and Vanguard. Data cover the ten years ended 12/31/13. The actively managed funds are those listed in the respective Morningstar categories. index funds are represented by

those funds with expense ratios of 20 basis points or less as of 12/31/13. All returns used were for the Investor share class.


Increased Sector Dispersion Helps Build a Case for Active Management

Top 10 Narrowest Dispersions. Rolling 3-Month Moving Average Dispersion (Best Sector Less Worst Sector)

Source: Fundstrat Global Advisors, Bloomberg, Fama/French


Dispersion Historically Widens to 25% in the Next 6 Months Following a -1.0 Standard Deviation Move

Dispersion: Rolling 3 months moving average (best less worst)

Source: Fundstrat Global Advisors, Bloomberg, Fama/French


Record inflows to domestic equity index funds in 2013 and 2014 further advance the case for active management in 2015

Net New Cash Flow into Domestic Equity Index Funds

Source: Investment Company Institute, www.ici.org


Careful Combination of Both Active and Passive Leads to Better Investor Outcomes

Growth of $1,000,000 (January 1971 - September 2014)

Source: Brinker Capital, Inc., Fact Set, Cambridge Associates, NCREIF. Data from 1/1/71 through 9/30/14. This Growth of $1M chart is for illustrative purposes only. No representation that the

results represent performance of actual client accounts is intended. The chart is intended to demonstrate the impact on a traditional portfolio of diversification through the inclusion of additional

asset classes over a long-term investment horizon. An investor cannot invest directly in an index. Past performance is no guarantee of future results.


Industry Trends

Active vs. Passive

Goals-Based Wealth Management –Behavioral Finance



Lack of Time Weakens Advisor Effectiveness

Source: Natixis Global Asset Management, “Getting to the Goal: Markets, emotions and the risks advisors must manage.” 2014

Advisors Must Possess Wide Array of Knowledge and Skills


Markets, Emotions and the Risks Advisors Must Manage

May, 2014 Natixis Study Key Findings

Advisors are responding to investor demand:

● 78% recommend setting goals

● 70% recommend target returns independent of benchmarks

● 77% say clients are OK if during a year they achieve target return but don’t beat benchmark


Advisors need to be a planner who discusses goals, helps investors define goals and explains how investments achieve investor goals.


Outsource to Help Manage Risk

Risk brings investing into perspective


As investment life-cycle shifts from accumulation to distribution, it is key to protect capital during downturns so investors don’t have to sell underpriced assets to fund distribution.

Therefore, the focus is to build risk-based portfolio strategies.

70% 75%of advisors say…clients want to minimize risk even if it means minimizing returns

of advisors say…clients are more interested in discussing risk


A Collective Report Card on Investor Behavior

The Dalbar Effect is a collective report

card on the advice industry. We have not

served the average investor well. We need

to change the advice delivery system.

Don PhillipsManaging Director, Morningstar, Inc.

Source: Tiburon Conference, 4/8/14.

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&docid=Hzb63LvGV7wIkM&tbnid=eCprwsDWleVH2M:&ved=0CAUQjRw&url=http://money.cnn.com/galleries/2009/fortune/0909/gallery.witnesses_meltdown.fortune/27.html&ei=TxVtU8qoI-ajsQSShgE&bvm=bv.66330100,d.aWw&psig=AFQjCNFkXaQMHDA2o6baOrAlfYxaat8FJg&ust=1399744163794919

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&docid=Hzb63LvGV7wIkM&tbnid=eCprwsDWleVH2M:&ved=0CAUQjRw&url=http://money.cnn.com/galleries/2009/fortune/0909/gallery.witnesses_meltdown.fortune/27.html&ei=TxVtU8qoI-ajsQSShgE&bvm=bv.66330100,d.aWw&psig=AFQjCNFkXaQMHDA2o6baOrAlfYxaat8FJg&ust=1399744163794919


Help Investors Fight Emotions that Lead to Bad Behavior

Source: Quantitative Analysis of Investor Behavior (QAIB), 2014, DALBAR, Inc. www.dalbarinc.com. Average equity fund investor and average bond fund investor performance results are based on the DALBAR 2014 QAIB study. DALBAR is an independent, Boston-based financial research firm. Using monthly fund data supplied by the Investment Company Institute, QAIB calculates investor returns as the change in assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for the period.

Hypothetical balanced Investment based on the performance of an investment weighted 50% to the S&P 500 index and 50% to the Barclays Aggregate Bond Index and rebalanced monthly. Equity benchmark performance is represented by the Standard & Poor's 500 Composite Index, an unmanaged index of 500 common stocks generally considered representative of the U.S. stock market. Fixed income benchmark performance is represented by the Barclays Aggregate Bond Index, an unmanaged index of bonds generally considered representative of the bond market. Indexes do not take into account the fees and expenses associated with investing, and individuals cannot invest directly in any index. Performance of an index is not illustrative of any particular investment. Past performance is no guarantee of future results.

S&P 500

Index

Hypothetical

Balanced

Investment

Barclays

Aggregate Bond

Index

Average

Fixed Income

Fund Investor

Average Equity

Fund Investor

Average Asset

Allocation

Fund Investor

Annualiz

ed R

etu

rn %

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Investor

Behavior

Gap

Performance of the markets vs. an average mutual fund investor January 1, 1984 to December 31, 2013

11.11%

7.67%

3.69%

1.85%

0.70%

11%

12%

9.73%

Investor

Behavior

Gap

Investor

Behavior

Gap


The Other Behavior Gap

Emphasize the two way commitment

Only 6.4% of

investors own their bad behavior

● 83% of advisors

see bad behavior as threat

Source: Natixis Global Asset Management, “Getting to the Goal” Study, September 2014


Make the Client Experience Positive

Make the BeFi conversation positive:

■ Use natural constructive behaviors to manage more negative behaviors.

■ Use mental accounting, framing, and purpose to manage herding, risk aversion, etc.

■ Thereby “nudge” investors in a productive direction.

Source: Dr. Daniel Crosby.


Helping Manage Behavioral Biases

● 117 documented behavioral biases

● Boiled down to three pillars of investor behavior:

● Simple

● Safe

● Sure

Source: Dr. Daniel Crosby.


Conservative

Strategies

Income

Strategies

Growth

Strategies

Brinker Capital Personal Benchmark: Visually Intuitive Allocation Tool Helps Simplify the Process for Investors

Source: Brinker Capital, Inc. For illustrative purposes only. Holdings as of 12/31/14 and are subject to change.

● Simple

● Safe

● Sure

1. Mental accounting

2. Framing through discussion of personal purpose

3. A joint commitment

4. More opportunities for advisor to reinforce success


Industry Trends

Active vs. Passive




Millennials + Boomers = Opportunities


Millennials’ Profile for Financial Services

● 1/3 use apps like Mint to determine how much they

should be saving2

● 42% say debt is their biggest concern3

● 54% paid for college versus 32% of Boomers3

● 53% think about their financial future daily versus 40%

of Boomers3

● 80% believe providing financial support for aging parents

is their responsibility4

● 34% hold at least a bachelor’s degree versus 25% for

Gen X and 34% for Boomers4

● Many have started saving for retirement in their early

20’s versus a median age of 35 for Boomers5

● Most financially conservative generation since the Great

Depression (52% in cash versus 23% for other groups)1

● 47% spend paycheck on debt3

Footnotes can be found on page 50


Millennials + Boomers = Opportunities

For financial advisor use only at the Brinker Capital Investment Management Forum.Brinker Capital Inc., a Registered Investment Advisor.

Technology Trends

ideas. discipline. outcomes.

Investment Management Forum 2015


● Financial advisors raised their tech spending from $66,291 in 2013 to $80,613 in 2015

● Global investment in FinTech is set to double from $10 billion in 2014 to $19.7 billion in 2015, according by MarketResearch.comand Banking Reports.

● About 59% of advisors said they are more likely to increase their technology spending in 2015

Financial Service Technology Trend


Talking Points

Drivers of Technology Trends in Financial Services

Digital Advisor Landscape

The Way Forward


Talking Points



The Way Forward


Drivers of Technology Trends

● Need for improved transparency and advisor to client

communications

● Cloud technologies (Easier and Cheaper)

● Firms targeting opportunities of underserved markets

● Value technology, fast adoption

● The Great Wealth Transfer

● Ease of integration


Expectation of Effortless Experience

● Consumer technologies have set the expectation of a better experience


Talking Points



The Way Forward



● An RIA, that provides technology-driven investment

advice and services directly to clients, generally for a fee,

and is principally, if not exclusively, delivered on-line.

● The digital advisor relies on low-cost and highly-

scalable electronic delivery mechanisms and algorithms

for outreach (marketing) and provision of investment,

planning and other services.

● In general, their approach is to reach the mass of

consumers by providing accessible and less expensive

financial advice and by cutting out the cost of the

traditional advisor.

Source: Fidelity Investments (Digital Advisor Landscape webinar)



Wealth management firms face challenges on many fronts

● Existing competitors: every segment is competing for the HNW

● New competitors: technology-driven wealth mgt. models on the rise

● Unprecedented surge of entrepreneurship

● Simpler, web-based and low-cost models appeal to Gen X and Y

● Demographic shifts: retirement, intergenerational wealth transfer

● Baby boomers starting to draw down assets

● Assets transitioning to Gen X / Y

● The average FA practice is at risk of seeing assets declining unless they can attract younger clients

Source: Aite Group


Audience reported the following benefits

Source: Research was conducted by Fidelity Investments (2014) 7- ibid

1. Lower fees for advice

2. Ease of doing business

3. Low or no minimum asset requirements

4. Online access to Do-It-Yourself financial tools


B2CB2CType:

Target Audience:

Value Prop:

Types of Digital Advisor Offering

Online Advice Planning Online Investment Management

● Mass affluent investors underserved by traditional advisors, many of whom are Gen-X and Gen-Y investors.

● Participants in defined contribution plans

● Mass affluent investors underserved by traditional advisors, many of whom are Gen-X and Gen-Y investors.

● Planning Tools, Coaching, and recommendations for savings, budgeting, and investing based on total view of the investors accounts.

● Economical, Transparent pricing

● Low Cost and efficient goal-based investment solutions

● Ongoing implementation of investment recommendations (rebalance, tax harvesting etc.)


B2CType:

Target Audience:

Value Prop:

Institutional Platform Providers

Types of Digital Advisor Offering

● Traditional RIAs

● Broker Dealers

● Third Party Administrators

● Technology that enables Advisors to offer private label digital capabilities. May offer other services.


Robo-Advisor Assets Under Management

Client Asset Growth 2013 1st Half ‘14

U.S. retail investment assets 14% 7%

Online IM firms (13 firms) 126% 82%

Source: Aite Group Research, 2014. and Michael Kitces. www.kitces.com

Firm Clients AUM Average Client

Wealthfront 18,800 $1,702,872,811 $90,578

Betterment 53,792 $1,105,081,259 $20,544

FutureAdvr 1,700 $232,124,148 $136,544


Outlook for delivery of Wealth Managment

Emerging Affluent to Mass Affluent

HNW to UHNW

Client Segment

Technology-led service Advisor People-led service


Talking Points



The Way Forward


Technology Opportunity “The Way Forward”

● Take advantage of the industry’s Technology Revolution. (Use technology to maximize.

● Access to better technology (adding more value than B2C Robo)

● Create more time

● Improved economics

● Opportunity to clearly demonstrate value proposition vs Robo

● Financial Planning - (Global Planning Advice)

● Behavioral Finance


Technology Trends “The Way Forward”

● New ways to market to younger generations

● Online prospecting tools

● Digital onboarding

● Differentiate by creating new experiences:


Current Advisor Issues

● Will interact on social media with Starbucks or Nordstrom but find it “creepy” from financial services firms6

● 2x more likely to turn to their parents for financial advice than a bank6

● $30T USD is going to transfer to younger generations by 2050 in the U.S. alone7

● Apps drive lifestyles. Think Uber, Open Table and Tinder. Over $1B in private equity in 3 years invested in tech-driven personal finances with a special emphasis on start-ups focusing on young investors.2

● 49% with $1M in net worth are using SRI to build portfolios versus 34% of Gen X, 33% of Boomers and 27% of Pre-Boomer millionaires5

● Control close to $2T in liquid assets, this is forecasted to grow to $7T by 20208



Millennials as Advisors

● Industry needs 160k new advisors in the next decade (average of 12-16k per year)9

● Only 5% of advisors are under 309

● 98% know about financial services industry, only 7% are interested in a career9

● Financial services least liked industry (Citigroup and Bank of America are most hated) – think “Occupy Wall Street”3

● 40% of CEOs say keeping younger workers is their biggest challenge10

● 68% say diversity in the workplace matters when picking an employer10



Build a Practice that Spans Generations


Sources

1. UBS Investor Watch, “Think you know the Next Gen investor? Think again.” 1Q2014.

http://www.ubs.com/content/dam/WealthManagementAmericas/documents/investor-watch-1Q2014-report.pdf

2. Sharf, Samantha. July 30, 2014. “The Recession Generation: How Millennials are Changing Money Management Forever.”

http://www.forbes.com/sites/samanthasharf/2014/07/30/the-recession-generation-how-millennials-are-changing-money-management-

forever/

3. 2014 Wells Fargo Millennial Study. https://www08.wellsfargomedia.com/downloads/pdf/com/retirement-employee-benefits/insights/2014-

millennial-study-report.pdf.

4. Pew Research Center, “The Sandwich Generation: Rising Financial Burdens for Middle-Aged Americans.” January 30, 2013.

http://www.pewsocialtrends.org/files/2013/01/Sandwich_Generation_Report_FINAL_1-29.pdf

5. TransAmerica Center for Retirement Studies, “The Retirement Readiness of Three Unique Generations: Baby Boomers, Generation X

and Millennials.” April, 2014. http://www.transamericacenter.org/docs/default-source/resources/center-

research/tcrs2014_sr_three_unique_generations.pdf

6. BNY Mellon, “The Generation Game.” September 15, 2014. http://www.sbs.ox.ac.uk/sites/default/files/Press_Office/Docs/whitepaper-

generation-game.pdf.

7. Accenture, “The Greater Wealth Transfer.” June, 2012. http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-CM-

AWAMS-Wealth-Transfer-Final-June2012-Web-Version.pdf.

8. Institute of Preparing Heirs. https://www.preparingheirs.com/

9. Demasters, Karen. May 22, 2013. “Aging Advisors Lack Succession Plan.” http://www.fa-mag.com/news/advisors--retirement-requires-

attention-of-advisory-firms-14363.html.

10. PWC, “Millennials at work: Reshaping the workplace.” March, 2013.

http://www.pwc.com/en_M1/m1/services/consulting/documents/millennials-at-work.pdf.

BP 154 BF 12/5/14