August 1, 2000

Changing of the Guard

One part of the two-headed FPA leadership is movin

Illustrations by Barry Blitt

It seemed like an arrangement that was bound to cause trouble. When the ICFP and IAFP merged, each association retained its big cheese: As of January 2000, David Brand and Janet McCallen, former executive directors of the ICFP and IAFP, respectively, became co-executive directors of the new FPA. The situation screamed "potential conflict," and some wondered how long it could last.

It lasted six months. On July 5, David Brand announced that he would be leaving the FPA. But while one might suspect a personality conflict or power struggle to have precipitated the decision, tears and recriminations seem scarce. "Janet and I work extraordinarily well together," says Brand. "We have a tremendous amount of respect for each other." This is not about personalities, he says. And while some might wonder if this is a sign of the tide turning in favor of the former IAFP, he says it's not about that, either.

"This is not about winning or losing. It's about what's right - and what's right is to move forward with one of us. It could have been either one of us." Brand believes that having two executive directors makes it difficult to establish a single tone or direction for the organization.

"If you know David, he's the kind of person who is always looking for new challenges. I would virtually guarantee that he felt that his work was done and he wanted to find something that could be more meaningful at this point," says Minnesota planner Ross Levin. "I do not believe it was a power struggle in any way, shape, or form."

Brand, who said he has yet to secure another position, plans to stay on for a few months to facilitate the transition.

Some wonder if he might be eyeing the post vacated in May by former CFP Board president Bob Goss, who held the position for more than nine years and said he is leaving in order to spend more time with his family. Brand says that he has had "no contact" with the CFP Board on the subject, noting that until the Board finishes the process of establishing what it wants in a new president, it would be "premature" to comment on it.

The match might be a good one. When asked to name the greatest challenge his successor would face, Goss suggested that it was the "balancing act" of serving both the practitioner community and the public at large. After five years with the ICFP and six months with the FPA, one suspects that Brand has had a lot of practice doing just that. - Karen Hansen


Capital Capers

According to the Internal Revenue Service's Spring 2000 Statistics of Income Bulletin, detailing tax year 1998 (the latest year available), there was an 8.4% increase over 1997 in adjusted gross income reported on the nation's 124.7 million income tax returns, leading to a new record high of $5.36 trillion in income. Total capital gains reported by nearly 21 million taxpayers increased 22% to $424.3 billion. The IRS notes that statutory adjustments in computing AGI included the new deduction for student loan interest, representing $700 million on 3.8 million returns. Among the credits against income tax were two new ones: the child credit ($15.2 billion on 24.9 million returns), and the education credit ($3.4 billion on 4.7 million returns) . . . As part of the IRS reorganization, the agency announced the creation of a new section, called the Large and Mid-Size Business Division (LMSB). The unit will serve 5,000 large businesses and 41,600 mid-sized businesses in a sector that includes commercial banking, savings and loans, securities and other financial services, as well as health care and insurance. The new division is designed to resolve taxpayer issues earlier and streamline the tax dispute process. The net result should be reduced cost and duration of IRS examinations. - Cort Smith


Move Your Assets

IDC sees even more money traveling onto the Web

In May we wrote about the onslaught of online banking and investment services. If you need more convincing that the investment world is changing at warp speed and wish for clear indications as to where it's headed, consider that research from IDC's new online brokerage forecast indicates that online assets will approach $2.6 trillion in 2004. The figure, says Shaw Lively, IDC research manager for online financial services, signals the advent of online brokers' move to the mainstream.

Based in Framingham, Mas-sachusetts, IDC (www.idc.com) studies the future of business - technology in general, and the Internet in particular.

IDC projects that more than $1 trillion of new assets will move onto the Internet over the next four years, and that competition online will continue to be intense and expensive.

Before the emergence of online brokerages, a firm's goal was to gather assets; this accounted for wrap fee accounts and compensation for brokers growing and sustaining big piles of money under their management. That will happen online, too, in various ways, with money coming in from existing investments, whether they're mutual funds or existing brokerage assets, or even from within the same firm. Case in point: Schwab.

"They're making a good living in the PR world because they simply keep converting scads of their offline customers into online customers, so it looks like their numbers are growing dramatically," says Lively. The situation is no different with Merrill Lynch or Paine Webber. By 2004 there will be 10 million new U.S. households beginning online investing relationships - with someone.

Who, exactly, is making this online beeline? High-income households earning over $100,000 represent the largest segment. IDC notes that in four years virtually all of that demographic group will access the Internet, with over 50% utilizing online brokerage services. Meanwhile, lower income groups won't be far behind: Today some 30%-40% are online, while in 2004 the figure should be closer to 60%. By 2004, high-income households will comprise 40% of all online accounts, but will represent two-thirds of online assets.

According to Lively, the online brokerage business model will evolve from a one-size-fits-all product to encompass at least four distinct business models, which he labels "Supermarket," "Best of Breed," "Traditional Brokers With Integrated Online Channels," and "Niche Players." Two years ago firms began to offer online trading, and from that emerged the concept of low-cost online trading. There will be further movement and more targeted marketing, he says, due to the high number of U.S. households hooked to the Web and firms segmenting their offerings in a quest for specific types of consumer relationships.

"Clearly, E*Trade wants to be an online financial supermarket, first in the U.S., and then as a global player," says Lively. He places Ameritrade, Schwab, and Datek into the "Best of Breed" category. While these firms may or may not offer other services, their primary focus will remain being a damn good and fast online broker. The Best of Breeds will soldier on in their core competency while adding stock picking or portfolio management tools or software that helps manage the tax consequences of their clients' trading.

The Traditional Broker model is the same model many online banks are following. "You have one account there; you'll get a broker that's assigned to you in an office at a physical location near you," says Lively. "If you choose to use that broker for advice you'll pay X amount to do that trade. If you choose to call an 800 number, you'll pay Y. If you go online and do it all yourself, it will cost $14.95 or whatever. One account, one firm." As a "traditional," Paine Weber positions itself as still being in the brokerage business, but will eventually build a rich online environment around the broker to enable him to focus on adding value for the client.

There's much activity with the Niche Players model, since there are millions of people to form segments, around which can be built any number of businesses utilizing an online platform, or entry point. Lively notes, for example, that he's seeing "a ton of startups around micro investing with a specific purpose, such as a college education focus." Morgan Stanley Dean Witter has already launched a site for self-directed millionaires, enabling them to manage their whole portfolio beyond investing. "People are doing in 'niche' what was done in the offline world a while ago, which was to start to peel off pieces and say, 'I can do this really well, and I think there's enough of a business here that I can make money doing it.' They don't need that many accounts to build their asset base to the point where they start to make real money."

Welcome to the brave new online world. Blink and you'll probably miss something important. - Cort Smith


Separate Checks

Two Web sites give advisors what they need to know to choose separate account managers

Two new firms, eFrontiers.com and InvestorForce.com, have launched Web sites that will make it easier than ever for advisors to screen separate account managers. Amazingly, the services are free.

For independent advisors, acting as a consultant to clients by picking separate account managers has become an attractive way of delivering investment advice. Mutual fund investing has become pass? to many of the wealthy individuals who seek advisors, and sophisticated asset allocation tools for constructing mutual fund portfolios have become commonplace on the Web.

Telling a client you can build a diversified portfolio with private money managers has a lot more pizzazz than offering a mutual fund portfolio. This is especially true since the privately managed portfolio usually won't cost the client more than a fund portfolio. What's more, the private managers will often tailor portfolio trades to help execute a client's personal tax strategy. It's no wonder why firms such as Lockwood Financial have flourished in the last few years, and that Schwab Institutional and TD Waterhouse have rolled out their own separate account manager programs for advisors. Now, the Web is about to give private account manager programs a big shot in the arm, thanks to eFrontiers and InvestorForce.

"This should open up the separate account manager business to a lot of advisors," says John Hanahan of Yukon Capital Management in Overland Park, Kansas. "It allows advisors like me to do the research on managers on my own."

Hanahan, one of four advisors that the two companies took on Web tours at our request, was not alone in his praise of the two sites. Steve Kessler, a veteran consultant on privately managed accounts, says the two sites can offer an advisor the research capabilities needed to narrow down their search to a few managers.

"You can get enough information from either of these sites to get the managers in front of you for a final presentation," says Kessler, former editor of the Investment Management Consultants Association's newsletter.

While our 1 1/2-hour tour of each site was educational, it was not enough to make a judgment on which is better. You'll probably want to use both sites to conduct a few searches and see which one works best for you. Each has its strong points.

Both sites allow you to screen managers based on their asset class, style, minimum account size, Sharpe ratio, tracking error, and a host of other data points. You can save searches and download all the data about as many managers as you want into an Excel spreadsheet. The sites also contain Web "RFP" tools to make it easy to request a proposal from managers who meet your requirements. Both contain news about the privately managed account sector of the RIA industry, but InvestorForce may have an advantage because it has hired journalists to write proprietary content for its sites, while eFrontiers uses content from business news services.

The two sites have similar business models. Charles Friedberg, who heads business development for InvestorForce, says his company gets 5% of the first year's fee that a manager receives on assets gathered via the site. Steve Cohen, president of eFrontiers, says his firm gets 5% of the first year's fee, 2% of the fee in the second year, and 1% of the third year's fee.

eFrontiers has the distinct advantage of licensing data from the industry leader, Mobius Group, now a unit of CheckFree Investment Services. eFrontiers has licensed a major chunk of the data in Mobius's mSearch database, which allows you to screen, sort, analyze, slice and dice separate account managers. The database contains 1,400 managers offering 5,000 products and may allow slightly more rigorous drill-downs into data.

While some of the most powerful analytics and graphing capabilities are not available in the eFrontiers version of the mSearch database, advisors will find enough data to narrow their search down to a few finalists. "Once you get it down to the finalists, you want each manager to send a representative to talk to you or you want to visit the manager, " says Kessler, the former journalist who now is with Quantum Asset Management, a turnkey asset management provider that uses separate account managers to build portfolios for brokers and RIAs. "You don't choose a manager using screenings like these, but you do eliminate the managers you don't want to look at."

InvestorForce uses a database originally developed for the internal use of Asset Strategy Consulting, a firm founded by Larry Davanzo that was acquired by InvestorForce. The Asset Strategy database contains information on 1,700 managers and 3,700 products, Friedberg says. While it may take time to build confidence in the reliability of the data offered by InvestorForce, the proprietary database is being used to generate graphics - an advantage over eFrontiers. In addition, InvestorForce includes a 401(k) search tool on its site that wowed our four testers.

Tom Grzymala of Alexandria Financial Advisors in Alexandria, Virginia, says he would not use either site for selecting separate account managers because his firm's research staff picks its own stocks for client portfolios. But he says the searchable database of 401(k) providers is attractive.

Both are handicapped by a bias toward serving large institutional consultants. It's difficult to say which of the two sites will be more focused on serving advisors to high-net-worth individuals.

For advisors who now use third-party providers - such as Lockwood, SEI Investments, or Portfolio Management Consultants - these sites are unlikely to be enough to make you change the way you do separate account business.

Bob Greenberg of Moran, Greenberg & Kimura in Costa Mesa, California, says the sites won't offer enough help in finding the best managers for taxable accounts, for instance, and he would rather rely on Lockwood to monitor such important details. "You get raw data from these sites and then have to do the rest of the work yourself," he says.

Still, for advisors who want to do their own legwork to offer private account management to clients, these new, free sites are a breakthrough.


End of the Line?

Syrius has much promise but is running out of cash

Most of the technology companies serving independent advisors are fairly small, which makes the industry susceptible to unpredictable twists and makes the all-important technology side of the business somewhat wild. The story of Syrius NP illustrates just how wild things can get.

Syrius is a two-year effort to develop an integrated comprehensive financial planning software package. Advisors have long dreamed of a package they could use to run their entire practice. Recently, Syrius has foundered, however. Although the French firm that has invested millions to write code for the program appears to be nearing the end of its project and on the cusp of achieving its lofty goal, Syrius may never make it to market because its French backers are reluctant to provide further funding.

Syrius is based on functionality in a DOS-based financial planning package called IFS. IFS debuted in the early 1980s as a total planning application for an advisor - tracking cash flow analysis, tax planning, portfolio management, contact management, etc. David Grace, mastermind behind the original IFS program, attracted as many as 550 users at one point.

Six years ago, the owners of IFS sold the rights to the package to Wilson Associates. But Wilson's plans to convert IFS to a Windows platform hit a series of snags and in mid-1997 Wilson abandoned its effort. At that point, a group of 10 planners who are dedicated users of the original DOS-based IFS program stepped in and bought the rights to the software.

The group of planners changed the name of the package to Total Resource Software, TRS, and sought a technology partner to convert the program to a Windows platform. In 1998, they connected with Paris-based SYCOM-X. The American planners and their French partners have worked for the last two years to launch the program, with the goal of allowing about 100 financial planners using the old, DOS-based IFS program to export their data into Syrius and move their practices into the 21st century. Now, the deal is in disarray.

TRS has backed out of its deal to migrate its 100 users to Syrius because the planners running TRS say the software isn't ready to be used in their practice. "It's a shame," says Chris Stanizale of Access Financial Planning in Clifton, New Jersey, and one of the 10 planners who owns TRS. "I think they're damn close to having something that works."

Phillippe Journeau, the founder of Syrius and majority stockholder, recently returned from a meeting with his French backers, who have told him to sell the company or find a major partner willing to help fund the final leg of its development and a marketing program to launch the software.

I installed a copy of the software in my office. While a full-blown review of the program would take days, it does appear that Syrius could be the first comprehensive planning and portfolio management application available to planners.

Journeau says he is negotiating with an American partner and hopes to raise about $2 million and launch the program this fall. Meanwhile, the 10 planners who own the rights to the original DOS program have lost patience with their French partners and have begun talks with David Grace, the original developer of their beloved program, to create a Windows version.


The Comments Are In on ADV

Not everyone is pleased with the proposed changes by the SEC

If you're running an independent advisory firm, then back office administration is probably a major headache and expense. Here's some good news: Web-based systems allowing you to outsource your back-office are about to become more prevalent and more dynamic.

ADVISORport.com, a new Web-based back-office system launched in May, will be a serious contender for managing your practice via the Web. Many such systems are likely to be launched in the next few months, but ADVISORport's breadth and sophistication are impressive.

About 18 months ago, we reviewed the first such back-office system, Advent Browser Reporting for Enterprise Users. It lets you use your Web browser to access portfolio reports being run at a remote location.

Next came service bureaus, such as those at SAI, Commonwealth Financial Network, and Pacific Financial, which take your customer account downloads from your custodian or brokerage firm, reconcile your client account data and upload it to the Web. Your client reports sit on their server and you can go to a secure site at any time to access all your client reports. Reports look the same as if you were running Advent's Axys portfolio management system in your office. The cost? SAI says it's four basis points, or as much as six or eight bps for customized reports or manual intervention in your data.

In addition to Advent, Portfolio 2000 is getting into the service bureau business. Its AdvisorMart.com service bureau will charge $50 to $100. For $100, you get Web access to reports and AdvisorMart mails paper reports quarterly to your clients. AdvisorMart not only provides access to many of the different reports produced by Portfolio 2000, your clients also have Web access to reports. This Web back office helped attract Morningstar's significant investment in P2000.

Recently, Centerpiece said it would create a Web-enabled portfolio management system. While Centerpiece plans to also offer a service bureau, it is months away and no details are available about it yet.

The latest entrant, ADVISORport.com, appears to be the most comprehensive back office yet. It offers much more than just portfolio management. It contains client contact management functionality, for instance, and allows you to conduct research via the Web using data from Thomson Financial, IBES, and others. Perhaps ADVISORport's most interesting feature is that it offers a separate account manager program rivaling services offered by Lockwood Financial, SEI, PMC, and others, giving you the ability to easily create proposals for clients. ADVISORport already has about 25 managers in the separate account program.

"ADVISORport.com gives advisors the power to outsource, automate, and customize key advisor functions - like portfolio construction, investment and manager selection, back office accounting requirements, client reporting, and more," according to the firm's Web site.

Gregory Horn, CEO of ADVISORport, gave me and four advisors a one-hour tour of the service. Horn, a founder of Persimmon Capital Management, says the first generation of the ADVISORport platform is geared to separate account management but a new release this summer will integrate mutual funds into the system.

The advisors who saw ADVISORport's online tour were wowed by the technology and the depth of the back office tools. "It's pretty impressive," says Jack Bowman of Private Investment Group, Inc. in Centerville, Ohio. Bowman, who has done some separate account work through Lockwood, says variable annuity data would need to be incorporated into ADVISORport and that turning your back office over to someone is "scary" to him. But the service intrigues him.

Larry Howes of Sharkey, Howes & Javer, of Denver, says that ADVISORport probably would not work for his firm, which manages well over $100 million in assets, but could work well for smaller firms. "These are neat guys and they have the right stuff," says Howes. Howes says the fees charged by ADVISORport.com, which start at 25 basis points and scales down to 10 bps for larger advisors, are likely to make the service too expensive for larger advisory firms.

tion fees at Schwab and other firms, the back office cost is covered. "When you consider that for between 10 and 25 basis points you get a separate account research administration system as well as back office," Horn says, limited.

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