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Beyond Milestones   2013 Annual Report

A letter from Paul and Steve

Paul Purcell

Chairman & Chief Executive Officer

Steve Booth

President & Chief Operating Officer

Beyond Milestones

A Message from Paul Purcell and Steve Booth

We're not ones to spend much time looking in the rearview mirror. For us, the real value of passing significant milestones, as Baird did in 2013, is the opportunity to look to the future and ask ourselves, "What's next for our clients and for Baird?" That said, it's essential to acknowledge the core values that helped propel us past these milestones, because these values are the foundation of even more meaningful accomplishments in the years ahead.

The most important quality behind Baird's success is the trust our clients place in us to provide them with expert advice that is in their best interests. One measure of that is the assets they entrust to us. Assets in our client accounts crossed the $100 billion threshold during 2013 and grew to more than $117 billion by yearend. The confidence this represents was echoed in the results of an independent survey of our Private Wealth Management clients in 2013: 98% of respondents strongly agreed that Baird is a company they can trust. And for the 10th consecutive year, small-cap and mid-cap fund managers* named Baird their "most trusted" source of investment research. We deeply value the trust clients place in Baird, and our associates have a passion for earning it each day.

Our mission, as we have said many times, is to give our clients great advice and outstanding service while being a great place to work. That's why we were honored when Baird was named one of FORTUNE's 100 Best Companies to Work For® for the 11th consecutive year in January 2014. We ranked No. 9, earning recognition in the top 10 for the first time - among such great companies as Google and Genentech - and ranking in the top 25 for the sixth consecutive year.

We have long held that aligning our business practices with our values - honesty, teamwork, respect and excellence - is what builds strong relationships with clients and with each other. This alignment is indisputably strengthened by the fact that we are independent and employee-owned. We have our reputation and capital on the line every day, which makes us very mindful that our success mirrors our clients' success. Our desire has always been to increase ownership in Baird as broadly as possible across our associates. During 2013, we significantly expanded shareholder eligibility for associates and passed another important milestone. A solid majority of Baird associates are now shareholders - 56% at the end of 2013. Additional stock eligibility changes made in late 2013 will broaden ownership to hundreds more associates in 2014.

* Greenwich Associates U.S. Equity Investors - Small/Mid-Cap Funds, 2004-2013. May 2013 survey conducted with 88 U.S. small-cap and mid-cap fund managers.

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Client assets surpassed
$100 billion during 2013.

Beyond transactions   Insightful advice and quality execution focused on our clients' interests have contributed to strong growth in client assets.

Client assets grow to $117 billion

Client assets grow to $117 billion
Strong markets and an inflow of new assets helped increase total client assets to $117 billion at the end of 2013. Both Private Wealth Management and Asset Management experienced strong growth, and assets managed by Baird Capital rose due to successful fundraising.

Record results

The confidence clients have in Baird's ability to help them meet their goals contributed to record performance during 2013. Revenues exceeded $1 billion for the first time to end at $1.1 billion, up 11% from a year ago. Operating income totaled $117 million, our best result ever and up 17% from 2012. Baird's 15.4% return on book value, including the cash dividend paid in December, outpaced most of the industry and did so without the significant leverage many firms in our industry employ to enhance returns. Each of our five businesses performed well, and Baird gained market share in very competitive environments.

Baird has produced 136 consecutive quarters of operating profitability - an exceptional record of performance that demonstrates the durability and consistency of Baird's platform. We have built five very strong businesses, each of which generates substantial cash flow. There are balance and diversity among them as well, so that the effects of a downturn in one business are usually offset by strength in the others. And now, more than ever, we are collaborating across businesses to bring new opportunities to clients. In just one example, we are launching a debt origination initiative that marries the skills of Investment Banking with those of Fixed Income Capital Markets to create a capability for clients that is differentiated in the middle market.

Growing with and for our clients

Baird's record of operating profitability is important because it enables us to reinvest to help clients not only reach their milestones, but also enjoy a superior experience doing so. Thanks to the strength and diversity of our businesses - and to our independence as a firm - we invested when others could not, or would not. Over the past decade, we have made substantial commitments in each of our businesses and throughout our Corporate Resource Group to deepen Baird's expertise and broaden our reach. In contrast to most of the financial services industry, employment at Baird has increased 22% in the past five years. It's noteworthy that 45% of all hires have been senior professionals at the Director level or higher. It's equally important to note that we have also expanded, and continue to broaden, the leadership opportunities available to existing Baird associates.

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Baird revenues exceeded $1 billion in 2013.

Beyond numbers   Our focus on what our clients value most has generated not only consistent growth, but also 136 consecutive quarters of operating profitability.

Baird stock value up 202%

Baird stock value up 202%
With our reputation and capital on the line every day, we manage conservatively to grow consistently. Baird's sustained profitability through all types of market conditions has enabled us to make substantial investments to serve our clients more effectively. Baird's stock value increased 202% over the past 10 years.*

During 2013, we again strengthened our businesses with capabilities to help clients achieve their goals. A few highlights point to "what's next" for Baird:

  • Broader skills Private Wealth Management recruited 44 experienced Financial Advisors and Branch Managers and graduated 32 professionals - the next generation of advisors - from its training program. Investment Banking further strengthened its global platform, hiring 20 bankers and adding depth in Healthcare, Europe and Financial Sponsor coverage.
  • Deeper expertise Institutional Equities & Research expanded research coverage to 713 companies and arranged more than 17,000 company-investor meetings during the year. Baird Capital, our private equity business, realigned its global knowledge management for more effective idea generation and deal flow.
  • Specialized capabilities Fixed Income Capital Markets formed a 35-person team that specializes in sales and trading of high-yield corporate debt, while also strengthening its Public Finance team. Asset Management hired a group that specializes in quantitative equity analysis and expanded its fixed income capacity with a team from a former sub-advisory client.
  • Better information Our substantial investments in information technology are part of our ongoing efforts to ensure Baird can compete at the highest level. These investments not only anticipate client needs but also enable more effective collaboration across our business platforms to meet those needs.
  • Smarter workplace In the competitive, quickly changing business of financial services, we regularly question how we can serve clients more effectively, free up associates' time to be better business partners and leverage our information technologies to do more of the heavy lifting. By focusing our day-to-day efforts on higher-value-added activities, we are creating capacity to support Baird's growth and improving the experience of our clients and associates.

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*Baird stock performance is based on the change in book value per share for Baird Financial Group common stock and includes cumulative cash dividends per share of $7.50, $1.60 and $1.65 paid in December of 2011, 2012 and 2013, respectively. Baird is privately held and no public market exists for its shares. Baird can repurchase shares of Baird stock at book value when associates leave the firm. Past performance does not guarantee future results.

The Standard & Poor's 500 Stock Index and Standard & Poor's 500 Financials Sector Index are unmanaged common stock indices used to measure and report value changes in the stocks comprising these indices. Indices performance information is obtained from Capital IQ and excludes dividends paid during the periods shown. Baird stock is not included in these indices.

For 11 years
running
, Baird has
been recognized
as a great place
to work.

Beyond jobs   Independence and employee ownership enable us to align our business practices with our values, creating a great place for both associates and clients.

Baird employment increases 22%

Baird employment increases 22%
We have invested in our businesses and increased employment to deepen our expertise and broaden our reach. Our values, associate ownership and business model are competitive advantages in retaining and attracting very talented, engaged associates who are focused on delivering great outcomes to clients.

Getting the most value from initiatives like these requires effective leadership. For several years we have committed significant resources to developing our current and future leaders and key managers. We continue to invest heavily to help associates develop their talents through coaching, mentoring and leadership training - skills they need to grow personally and to help Baird grow. We are also being similarly intentional about increasing the diversity of our workforce. Progress, while slow, is steady and is getting constant attention from senior leaders to ensure it continues. It is in our clients' best interests that Baird brings diversity of thought and talent to every discussion.

Leadership transition continues

As planned, Steve became Baird President & Chief Operating Officer on January 1, 2014, and is now more deeply involved in guiding Baird's top business goals. Paul will continue as Chief Executive Officer through the end of 2015 and serve as Chairman for several years after that. In the meantime, we both are very involved in driving the strategic priorities that will move Baird toward "what's next."

Neither of us is the type to rest on Baird's accomplishments. Our nature as entrepreneurs is to look forward - to look beyond - to see where the firm can do an even better job of serving our clients and capturing the opportunities that await us. In that regard, Baird has never been better positioned. We have highly skilled, engaged associates and five very strong businesses, each with exceptional franchises, outstanding execution and complementary opportunities for growth. More important still, we have the trust and confidence of our clients. They will always be the most satisfying measures of our success and the touchstones for every important decision we make.

Paul E. Purcell

Chairman & Chief Executive Officer

Steve G. Booth

President & Chief Operating Officer

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