Blueprint Project, Phase II

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

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

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


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%


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%


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%


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


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


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


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)


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


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)


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%


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


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


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

=

-

=

-

=

-

=

-


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


Total Rev. ~26 bps

Total Rev. ~26 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)


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 +)


• 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


• 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)


• 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


• 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


• 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


• 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


• 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

Documents

Blueprint Project, Phase II