Most of our products and services are known as wealth management business solutions, and include:
•
Investment processing and investment operations outsourcing solutions for U.S. banks, trust companies, investment managers, and European private banks; •
Investment management programs to affluent investors, families, retirement plan sponsors and not-for-profit organizations; and •
Fund processing solutions to U.S. banks, investment management firms and investment companies that sponsor and distribute mutual funds and other U.S. regulated investments. We also offer these solutions to investment managers worldwide that sponsor and distribute alternative investments. General Development of the Business
For over 35 years, SEI has been a leading provider of wealth management business solutions for the financial services industry.
We began doing business in 1968 by providing computer-based training simulations to train bank loan officers in credit lending practices.
1970’s
We developed an investment accounting system for bank trust departments in 1972, and became a leading provider of investment processing outsourcing services to banks and trust institutions.
Page 2 of 89
1980’s
SEI became a public company in 1981. We entered the asset management business in 1982 and launched a series of money market mutual funds for our bank clients. Later in the decade, we expanded our services to bank clients by offering mutual fund accounting services, and investment operations outsourcing services.
1990’s
We introduced our “Manager of Managers” investment process, and offered these programs to investment advisors who manage wealth for their high-net-worth clients. We entered the institutional investor market and began offering asset management programs to retirement plan sponsors and institutional investors in selected global markets, including the United States, Canada, Europe, South Africa and East Asia.
2000’s
We developed broader, more strategic solutions for our clients and markets, including a complete life and wealth platform for operating an investment advisory business, a total operational outsourcing solution for investment managers, a fully-integrated pension management system for retirement plan sponsors and a complete life and wealth solution for affluent families.
Strategy
We seek to achieve growth in earnings and shareholder value by strengthening our position as a provider of wealth management business solutions. Business strategies to achieve this objective include:
•
Help corporations manage retirement plans. Under-funded pension plans threaten the financial health of many corporations. We help retirement plan sponsors to evaluate the impact of their pension plans on the financial health of their organizations. We deliver customized asset management solutions that integrate pension decisions and corporate finance needs, enabling plan sponsors to make better decisions about their plans and to manage their pension assets more effectively. •
Create broader solutions for wealth service firms . Global banks, investment managers and financial advisors demand greater efficiencies in their operations, seek expanded capabilities to manage their businesses, strive for a better view of their clients, and require new products to meet the evolving needs of their markets. We are developing next generation business solutions integrating technology, operating processes, and financial products designed to help these institutions better serve their clients and provide opportunities to improve their business success. •
Help “baby boomers” manage their life and wealth goals. We are enhancing our solutions to enable our wealth service firm clients to better serve members of the post-World War II “baby boom” generation now approaching retirement. Baby boomers demand a holistic wealth management experience that focuses on their life goals and provides them with an integrated array of financial services. We help these investors identify their goals and offer comprehensive life and wealth advisory services including life planning, investments and other financial services. •
Expand into global markets . Global markets are large and present significant opportunities for growth. We are intelligently evolving U.S. business models for the global wealth management marketplace, focusing on the needs of institutional investors, private banks, investment advisors and affluent individual investors. Fundamental Principles
We are guided by these fundamental principles in managing the business and adopting these growth strategies:
•
Achieve organic growth in revenue and earnings . We seek to grow the business by providing additional services to clients, adding new clients, introducing new products, and adapting products for new markets. •
Forge long-term client relationships . We strive to achieve high levels of customer satisfaction so we may forge close and long lasting client relationships. We believe these intimate relationships enable us to market additional services, and acquire knowledge and insights that fuel the product development process. •
Invest in product development . We continually enhance our products and services to keep pace with industry developments, regulatory requirements, and the emerging needs of markets and clients. We believe investments in research and development give us a competitive advantage in our markets. Page 3 of 89
•
Adopt business models which generate recurring revenues and positive cash flows . Recurring revenues generate predictable cash flows, which serve as a source of funds for continuing operations, investments in new products, common stock repurchases, dividend payments, and principal and interest payments on debt. •
Leverage investments across the business . We design and implement product solutions and business process capabilities to serve the needs of multiple markets. This philosophy facilitates the design of comprehensive solutions while minimizing duplicative research and development efforts. These solutions can often be developed into single operating platforms that can be used by the entire company, potentially offering operating efficiencies that can benefit corporate profitability. •
Create value for shareholders . The objective of achieving long-term sustainable growth in revenues and earnings strongly influences the management of the business. This philosophy guides corporate management practices, strategic planning activities, and employee compensation practices. Products and Services
Investment Processing
We offer investment processing services to U.S. banks, trust companies, investment managers, and private banks in the United Kingdom and Continental Europe. Investment processing services are an integral component of our wealth management business solutions offered to banks and investment advisors. Our proprietary software system, TRUST 3000 ® , supports our U.S. investment processing business by serving as the system of record for trust institutions. TRUST 3000 ® is a complete trust accounting and investment system that provides straight-through-business processing for investment transactions for multiple types of investment accounts, including personal trust, corporate trust, institutional trust, and non-trust investment accounts.
Through the integrated investment functionality of TRUST 3000 ® , we support the full range of activities for wealth management including:
•
Investment management – portfolio analysis, investment decision support, and performance measurement reporting; •
Trade execution services – straight-through trade order management and electronic trading services for equities and mutual funds; •
Account services – cash processing and investor reporting for all accounts. Our software supports many specialized activities associated with personal trust management including principal and income segregation, uninvested cash and overdraft management, and beneficiary payment processing; •
Investment processing – securities processing and investment accounting for all types of domestic and global securities; and •
Compliance reporting – audit, compliance, and regulatory reporting. This core accounting application combines comprehensive trust and securities accounting with integrated and automated front, middle, and back-office solutions. Clients can manage their front-office operations through the use of our systems to maintain and service their clients. The middle-office performs the administrative activities of the front-office and provides the connection between the front-office and the investment operations area, which is the back-office.
Revenues from investment processing services are earned as monthly fees from contracted services including software licenses, information processing, and investment operations. Revenues are primarily earned based upon the number of trust accounts being serviced. Revenues may also be earned based upon project-oriented contractual agreements related to client implementations. These revenues are recognized in Information processing and software servicing fees on the accompanying Consolidated Statements of Operations, except for fees earned associated with trade execution services.
Investment Management Programs
We offer investment management programs to affluent investors and families, and institutional investors. These programs are built around investment strategies which are tailored to meet the needs of different investors, taking into consideration their objectives and risk tolerances. Investment management programs consist of mutual funds and separate account programs. Mutual funds cover multiple asset classes including money market, equity, fixed-income and alternative investment portfolios, primarily in the form of registered investment companies. Mutual funds are organized into trusts which are governed by various boards of trustees. We serve as the administrator, transfer agent, investment advisor and distributor for many of these funds. The investment advisory and distribution contracts are subject to annual renewal by the board of trustees of the funds. These contracts provide for the payment of fees to us based on a percentage of the average daily net assets of each fund.
Page 4 of 89
Focused on investors’ objectives, the investment process is based on five principles: asset allocation, portfolio structure, tax management, multiple specialist managers, and continuous portfolio management. The investment management programs allow access to some of the best style-specific money managers who are normally not available to individual investors. This innovative approach, called Manager-of-Managers, is designed to promote adherence to our disciplined investment principles in that each manager’s performance is tracked and scrutinized. The potential benefit of this method is improved performance with reduced volatility, because it eliminates the task of attempting to predict which style of investing will be in favor at any particular time. We maintain the asset class exposure within the specifically defined boundaries of our client’s asset allocation plan by incorporating a formal rebalancing program in the asset management process.
As of December 31, 2006, we managed $116.5 billion in total assets, net of assets managed by LSV Asset Management (LSV), including $89.5 billion invested in our fixed-income and equity funds or through separately managed account programs, $13.5 billion invested in our liquidity funds and $13.5 billion invested in our collective trust fund programs.
Revenues from investment management programs are primarily earned based upon a contractual percentage of net assets under management. These revenues are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.
Fund Processing
We offer fund administration and distribution services to U.S. banks, investment management firms and investment companies that sponsor and distribute mutual funds and other U.S. regulated investments. We also offer these services to investment managers worldwide that sponsor and distribute alternative investments, including hedge funds, fund of funds, private equity funds, and other investment vehicles.
Recordkeeping and administrative activities associated with the operations of pooled investment funds include:
•
Fund accounting – investment tracking, transaction processing, fund valuation, investment and tax reporting, and regulatory compliance; •
Fund administration – financial statement preparation, regulatory filings, coordination of audits, legal and tax support services; •
Trustee and custodial services – trustee and custody services for U.S. regulated investments, and off-shore investments; •
Investor services – shareholder services for fund investors; and •
Distribution support services – business, marketing and product development planning. We also offer operational outsourcing solutions for the administration and management of separately managed account programs as well as total operational outsourcing solutions for investment management firms.
As of December 31, 2006, we administered $185.1 billion in non-SEI mutual funds and other pooled assets.
Revenues from fund processing are primarily earned based upon a contractual percentage of net assets under administration. These revenues are recognized in Asset management, administration and distribution fees on the accompanying Consolidated Statements of Operations.
Business Segments
Business segments are generally organized around our target markets. Financial information about each business segment is contained in Note 12 to the Consolidated Financial Statements. Our business segments are:
Private Banking and Trust – provides investment processing and investment management programs to banks and other trust institutions located in the United States and Canada;
Investment Advisors – provides investment management programs to affluent investors through a network of independent registered investment advisors, financial planners, and other investment professionals in the United States;
Enterprises – provides investment management programs and administrative outsourcing solutions for retirement plan sponsors and not-for-profit organizations globally;
Page 5 of 89
Money Managers – provides fund investment processing and institutional and separate account operational outsourcing solutions to banks, investment managers and mutual fund companies located in the United States and to investment managers worldwide of alternative asset classes such as hedge funds, fund of funds, and private equity funds;
Investments in New Businesses – provides investment management programs to investment advisors and banks located outside the United States and investment processing solutions to banks and trust institutions in the United Kingdom and Continental Europe. This segment also includes our investment management programs offered to affluent families residing in the United States both directly and through a network of independent advisors; and
LSV Asset Management – is a registered investment advisor that provides investment advisory services to institutions, including pension plans and investment companies.
The percentage of consolidated revenues generated by each business segment for the last three years was:
| 2006 | 2005 | 2004 | |||||||
| Private Banking and Trust |
24 | % | 37 | % | 42 | % | |||
| Investment Advisors |
19 | % | 27 | % | 26 | % | |||
| Enterprises |
14 | % | 11 | % | 10 | % | |||
| Money Managers |
10 | % | 11 | % | 11 | % | |||
| Investments in New Businesses |
8 | % | 14 | % | 11 | % | |||
| LSV (1) |
25 | % | — | — | |||||
| 100 | % | 100 | % | 100 | % |
Private Banking and Trust
The Private Banking and Trust segment offers investment processing services and investment management programs to banks and trust institutions in the United States and Canada. We believe our investment processing services help banks and trust institutions reduce risk, improve quality, and gain operational efficiency to devote more of their resources on servicing their clients.
We offer investment processing solutions through two primary business models: an application services provider (ASP) model and a business services provider (BSP) model. In both models, we own, maintain and operate the software applications and information processing facilities.
•
Application Services Provider Banks using our ASP model outsource investment processing technology software and computer processing but retain responsibility for investment operations, client administration, and investment management. Clients operate our ASP Solution remotely while fully supported by our data center using dedicated telecommunications networks. The ASP model includes a dedicated relationship team that supports our client’s business. We assist our clients with strategically reevaluating their systems and process needs as their businesses change.
•
Business Services Provider The BSP model is an extension of our ASP solution. It was designed for Private Banks, and other trust organizations that prefer to outsource their entire investment operations. With the BSP solution, we assume the entire back-office processing function. The BSP model includes: investment processing; account access and reporting; audit, compliance and regulatory services; custody and safekeeping of assets; income collections; securities settlement; and other related trust activities.
New clients undergo a system implementation process which can take a few months for smaller institutions and up to 15 months or more for larger institutions. During the implementation process, we convert our client’s investment and financial data to our systems and train them on optimizing the use of our systems. Our goal is to help reengineer and transform their business operations. We earn a one-time implementation fee for the data conversion services.
Page 6 of 89
Client contracts have initial terms that are generally three to seven years in length. At December 31, 2006, we had significant relationships with approximately 140 banks and trust institutions, including trust departments of 8 of the 20 largest United States banks. We also had single-product relationships with approximately 200 additional banks and trust institutions.
Our principal competitors in the investment processing business for this segment include SunGard Data Systems Inc. and Metavante Corporation, a division of Marshal and Isley. We also consider ‘in-house’ solutions to be a form of competition. Many large financial institutions develop, operate and maintain proprietary investment and trust accounting systems.
Investment Advisors
The Investment Advisors segment offers wealth management solutions to registered investment advisors, many of whom are affiliated with or are registered as independent broker-dealers, financial planners, and life insurance agents located throughout the United States. These wealth management solutions include SEI asset management programs and “back-office” investment processing outsourcing services. We also help advisors manage and grow their businesses by giving them access to our marketing support programs, business assessment assistance and recommended management practices. Our solutions aim to help investment advisors reduce risk, improve quality, and gain operational efficiency to devote more of their resources to servicing their clients.
Advisors are responsible for the investor relationship which includes creating financial plans, implementing investment strategies, and educating and servicing their customers. Advisors may customize portfolios to include separate account managers as well as SEI mutual funds. Our wealth and investment programs are designed to be attractive to affluent or high-net-worth individual investors with over $500 thousand of investable assets and small to medium-sized institutional plans.
We continually enhance our investment offering to meet the emerging investment needs of the baby boomer. Our goal-based investment program was first introduced in 2004. This program, totaling over $3.9 billion in assets at the end of 2006, is designed to assist higher-net-worth investors with a system for portfolio construction to support customers with multiple goals across diverse risk and time parameters. In 2006, we also expanded our Managed Volatility Portfolios to include a global strategy and we introduced phase one of our Distribution Focused strategies. Our Managed Volatility Portfolios seek to capture some of the return potential of equities without all of the associated risk. For many, they are a good alternative to a portfolio heavily weighted towards fixed income. As of December 31, 2006 these portfolios had approximately $500.0 million in assets. Our Distribution Focused strategies are income oriented portfolios targeted at the retired baby boomer that needs regular cash distributions from their investments. We expect to complete the development and rollout of these strategies in 2007.
While we continue to enhance our investment offering for the end investor, we have also enhanced our operating platform for advisors. In 2006, we upgraded our BusinessBuilder desktop tool for advisors, improved customer statements, and made significant progress in the build out of a new proposal generation tool which will be rolled out in early 2007.
Although we have agreements with over 6,000 financial advisors, our business is based primarily on approximately 1,300 clients who, at December 31, 2006, had at least $5.0 million each in customer assets invested in our mutual funds and separately managed accounts. Revenues are earned largely as a percentage of average assets under management.
The principal competition for our investment management products is from other money managers and mutual fund companies. In the advisor distributor channel, the principal competitors include AssetMark, Brinker, EnvestNet, Fidelity Investments, Lockwood Advisors, Inc., a subsidiary of Bank of New York, and other broker-dealers.
Enterprises
The Enterprises segment offers investment management programs and administrative outsourcing solutions for retirement plan sponsors and not-for-profit organizations globally. Clients can outsource their entire investment management needs and the administration for defined benefit, defined contribution, funded welfare and non-qualified deferred compensation plans as well as the administration of endowment and foundation asset pools.
Page 7 of 89
The outsourcing program provides a strategic platform integrating the Manager-of-Managers investment process, plan administration services, and consulting services. Plan administration services include trustee, custodial, benefit payment services, record-keeping services, and donor administration. Consulting services include actuarial services, asset liability modeling, and the customization of an asset allocation plan that is designed to meet long-term objectives.
By outsourcing retirement plan services, we believe clients benefit from an investment approach which is built around an investment plan designed to meet the client’s long-term needs, and an investment process that removes the responsibility of manager selection, is designed to reduce business risk, provide ongoing due diligence, and increase operational efficiency.
Fees are primarily earned as a percentage of average assets under management. At December 31, 2006, we had relationships with approximately 470 institutional investor clients. The principal competitor for this segment is Frank Russell Company, a subsidiary of Northwestern Mutual.
Money Managers
The Money Managers segment provides investment managers with a suite of back and middle office investment processing services associated with operating an investment fund or account. We offer U.S.-based managers support for traditional investment products such as mutual funds, exchange-traded funds, institutional and separate accounts, and provide outsourcing services including accounting, administration, reconciliation, investor servicing and client reporting. In addition, we provide many of the same services to investment managers located worldwide who manage alternative investments such as hedge funds, funds of funds, and private equity funds. We believe our fund and investment processing outsourcing solutions help investment managers reduce risk, improve accuracy and efficiency, and receive tools to better manage their business.
Contracts for our fund and investment processing services generally have terms ranging from one to five years. Fees are primarily earned as a percentage of average assets under management and administration. At December 31, 2006, we had relationships with approximately 161 investment management companies and alternative investment managers. Our principal competitors for this segment include PFPC Worldwide Inc., a member of the PNC Financial Services Group, Inc., Citco, and State Street Bank and Trust Company.
Investments in New Businesses
The Investments in New Businesses segment represents other business ventures intended to expand our investment management programs and services to private banking and distribution partners and high-net-worth investors.
We offer investment management programs to banks and distribution partners located outside the United States and investment processing solutions to private banks and trust institutions in the United Kingdom and Continental Europe. Leveraging the capabilities of our Global Wealth Platform, we are expanding our investment processing solutions offered to global private banks.
We are also expanding our investment solutions to include affluent families who reside in the United States and the United Kingdom. The family wealth management solution offers flexible family-office type services through a highly personalized solution while utilizing the Manager-of-Managers investment process.
We have made, and will continue to make, significant investments in technology, marketing and infrastructure to develop and support our new business initiatives.
At December 31, 2006, there were approximately 150 clients for the global private banking and distribution business and approximately 190 for the family wealth solution. The principal competitor for the global business is Russell Investment Group. The principal competitors for the family wealth solution are diversified financial services providers focused on the high-net-worth and ultra-high-net-worth market.
LSV Asset Management
LSV is a registered investment advisor that provides investment advisory services to institutions, including pension plans and investment companies. LSV is a value-oriented, contrarian money manager offering a deep-value investment alternative utilizing a proprietary equity investment model to identify securities generally considered to be out of favor by the market. LSV is currently the specialist advisor to a number of our equity mutual funds. In addition, LSV is a portfolio manager to a portion of our global investment products. At December 31, 2006, LSV managed approximately $70.6 billion in total assets, of which $2.4 billion were assets in our mutual funds.
Page 8 of 89
Business Segment Name Changes and Restructuring
Three business segments will change names on January 1, 2007. The Private Banking & Trust business segment will be renamed as Private Banks, the Enterprises business segment will be renamed as Institutional Investors, and the Money Managers business segment will be renamed as Investment Managers.
The structure of two of our business segments will change on January 1, 2007. The investment management programs and services offered to global private banks of the Investments in New Businesses segment will move to the Private Banks segment. Originally, business segments were organized around our operations in the United States, and our non-U.S. operations were included in the Investments in New Businesses segment. As our non-U.S. businesses mature, we will consolidate the U.S. and non-U.S. activity into one globally-managed business segment.
As a result of these changes, the Company’s business segments in 2007 will be:
Private Banks – provides investment processing and investment management programs to banks and trust institutions worldwide;
Investment Advisors – provides investment management programs to affluent investors through a network of independent registered investment advisors, financial planners and other investment professionals in the United States;
Institutional Investors – provides investment management programs and administrative outsourcing solutions to retirement plan sponsors and not-for-profit organizations worldwide;
Investment Managers – provides fund investment processing and institutional and separate account operations outsourcing solutions to banks, investment managers and mutual fund companies located in the United States and to investment managers worldwide of alternative asset classes such as hedge funds, fund of funds, and private equity funds;
Investments in New Businesses – provides investment management programs to affluent families residing in the United States and Europe both directly and through the SEI Wealth Network ® ; and
LSV Asset Management – is a registered investment advisor that provides investment advisory services to institutions, including pension plans and investment companies.
In 2007, prior year amounts will be reclassified as required to conform to the restructured business segments.
Research and Development
We are devoting significant resources to research and development, including expenditures for new technology platforms, enhancements to existing technology platforms, and new investment products and services. We spent approximately $139.1 million in 2006, $126.7 million in 2005, and $95.0 million in 2004, of which we capitalized approximately $73.3 million in 2006, $67.6 million in 2005, and $37.0 million in 2004 relating to the development of new technology platforms. Total research and development expenditures as a percentage of revenues were 15.7 percent in 2006, 16.4 percent in 2005, and 13.7 percent in 2004. The percentage in 2006 excludes the revenues of LSV, which was consolidated into our financial statements beginning in January 2006.
System requirements to satisfy the needs of the financial services industry are complex, substantial and continually evolving for a number of reasons, including, increased trading volume, introduction of new investment alternatives, changes in technology, changes in laws and regulations, and increased competition. We believe service to existing and potential clients is enhanced by substantial investments to improve current software products and to develop new products and services for the financial services industry. Using a combination of SEI professionals and partner firms to accomplish the design, development, and enhancement of our software products, we will continue to emphasize the importance of research and development to enhance our competitive position in the industry.
A significant portion of our research and development spending is related to building our Global Wealth Platform. We anticipate this platform will be used by all of our business segments except LSV to manage all or most of their client processes. The platform consists of various components, each offering different capabilities and provides straight-through business processing that integrates most front, middle and back-office operations. The front-end components will be used by our personnel to manage all middle-office operations and by clients to manage their client administration and portfolio management processes. The back-office components will streamline all investment related activities, eliminate many manual processes, and perform trade order execution and securities settlement activities.
Page 9 of 89
We anticipate the Global Wealth Platfo
