Making a Statement

Lou Gerber says he was six weeks away from being forced to sell his home and move in with his in-laws.

December 2000

Making a Statement

by Andrew Gluck

Lou Gerber says he was six weeks away from being forced to sell his home and move in with his in-laws. That was a year ago--before he received $17 million of venture capital funding for StatementOne, a company that is on the brink of revolutionizing the independent advisor business.

Gerber appears to have solved the most nagging problem confronting reps of independent B/Ds: He's got a way of delivering consolidated statements to them and to their clients over the Web. And, unlike the data management hassles inherent in the current solution for providing consolidated statements, StatementOne doesn't involve heavy lifting by a rep.

After missteps and

near disasters, an entrepreneur is offering to independent B/D reps the Holy Grail of advisors: a true consolidated statement

Gerber's ashamed of how close he came to financial ruin just a year ago. After he told me about how close he was to losing his home, he asked me not to write about that. Sorry, Lou, but you said it on the record, and it's important for readers to know that you have been driven by a strong belief in your vision.

I met Gerber for the first time at an industry conference four years ago. Tall and disheveled, he stood behind a table at a booth and desperately tried to get passersby interested in his company, then called Fundscape.

Gerber was trying to present consolidated statements of disparate mutual fund company holdings. Since what he was selling was so complicated and no one was buying it, there wasn't much of a story then. How things have changed.

Gerber's company has gone from six to 40 people since getting funding this past June. Allianz and Aetna are among his backers, as well as venture capital firms Desai Capital, Boston Ventures, Charterhouse International, and Axiom.

Gerber's got some big clients, too. FSC, the Atlanta-based B/D with about 1,600 reps, has signed up for StatementOne, and so has Advantage Capital, which has about 500 reps. In addition, StatementOne has been hired by five of the B/Ds owned by Dutch financial services behemoth ING: Locust Street Securities (2,500 reps); Multi Financial (600); Vestax (600); IFG (500); and Compulife (100).

How could a tiny firm come out of nowhere to become a big player so suddenly? In Gerber's case, it appears to have been a combination of being the right guy in the right place at the right time. And hard work.

Creating a consolidated statement for independent advisors has long been a nightmarish challenge. The easiest solution has been to run your own portfolio accounting software. But it's not really so easy. Using the most popular packages, such as Advent Axys, Centerpiece, dbCAMS, Portfolio 2000, or CapTools, means downloading data from a B/D or clearing firm or from multiple B/Ds and custodians. Next, you reconcile the data to be sure it's correct. Then you run your reports. Advisors practically shut down for a couple of days each quarter while they run their reports.

The great majority of registered reps don't do their own portfolio reporting and don't offer their clients a consolidated statement: most reps don't have the necessary money, time, or technology skills. Yet almost all reps yearn for consolidated statements. And for good reason.

The current system is a mess that leaves clients buried in a blizzard of paperwork. Clients receive monthly statements from a rep's clearing firm, fund companies, insurers, and other product providers. Here's the problem.

Reps at independent B/Ds run all stock, bond, warrants and options sales through their clearing firm. Two clearing firms dominate the independent advisor industry: Fidelity's National Financial Services division and DLJ's Pershing division. When a rep clears through one of these two giants, his or her clients get a consolidated statement for all their holdings.

But when it comes to mutual funds and variable annuities, reps typically have a choice of where to transact their sales. Traditionally, a paper application sent directly to the fund company or insurance company was the dominant mode of operation. In recent years, however, reps in growing numbers have been transacting mutual funds and VA sales through their clearing firms. Despite the growing number of independent reps clearing fund and VA trades through Pershing and NFS, Gerber estimates that no more than 60% of fund and VA sales is cleared through those two firms. The rest goes directly to the fund and insurance companies.

When that happens, Gerber says, the assets remain custodied at DST and PFPC, the two big transfer agents for fund companies. In these instances, the rep's clients receive individual statements from each fund family; the investments held at DST or PFPC do not show up on the statement sent by Pershing or National Financial.

The independent B/Ds have been hamstrung in their ability to offer this service to reps, which has placed independent RRs at a competitive disadvantage to brokers and wirehouses. The wirehouses have long been able to offer consolidated statements.

But the consolidation in the B/D industry is changing the competitive equation. SunAmerica and ING now have sales forces rivaling those at Merrill and Salomon Smith Barney. They want their reps to have consolidated statements and be on an equal footing with the wirehouses. Enter Lou Gerber.

Gerber, 45, took a job at Merrill Lynch in 1979 working on performance measurement. In 1983, he struck out on his own, founding a pension consulting firm. In 1989, he sold the company to Provident Bank. At Provident, one of Gerber's duties was helping the bank launch its own family of mutual funds. Gerber found that one of the chief obstacles to getting brokers and other intermediaries to sell the Provident funds was that retail clients would get a separate statement from his fund company. Brokers didn't want the confusion of giving clients yet another statement.

In 1993, Gerber left Provident and started Monitor Advisory Services. He was back to doing pension consulting and performance reporting, but he was also thinking about a way to create consolidated statements: He hired programmers to begin creating a software package to address this issue.

In 1994, Gerber released a DOS version of Fundscape, software that allowed individual advisors to create a consolidated statement. In 1995, a Windows version was released, followed in 1997 by version 2 for Windows. "Fundscape allowed us to go to market and put us in front of the community," says Gerber. "But we never had a successful release."

Not too many advisors bought Fundscape, and it was a good thing they didn't. Gerber concedes that the program was fraught with problems, not the least of which was that it required taking downloads from many different clearing firms, insurance companies, and B/Ds. Every time a clearing firm or insurer changed the way it presented its data, the software would need to be fixed. It was a nightmare.

But the nightmare laid the groundwork for Gerber's next big move. In 1995, B/Ds gave him access to their data to help him come up with a solution. So did DST, the huge transfer agent to many fund families.

By the end of 1999, with an intimate understanding of the technical idiosyncrasies at major clearing firms, transfer agents, insurance companies, and B/Ds, Gerber made the big decision to move Fundscape to a Web-based platform. That helped to change everything. Gerber was able to attract the attention of executives at Ernst & Young's consulting arm. "E&Y stepped up," says Gerber.

"We had no money, but they believed in our idea enough to front the project. We had 25 high level E&Y consultants working in New York with us beginning in November 1999, and I just released the last consultant two weeks ago."

This June, Gerber secured the $17 million he needed to execute his vision. The main accomplishment: StatementOne downloads data at the enterprise level. Gerber says this is better than taking downloads based on a rep number.

Gerber explains that when a RR sells a mutual fund, he or she usually has a client come in and fill out a paper form. That form gets faxed to the fund company. At the company, the data in the form gets transferred to an accounting system. About 15% of the time, Gerber says, a keypunch operator makes a mistake in entering the rep's identification number.

Gerber says StatementOne downloads all of a B/D's data instead of doing it one rep at a time. Then, in-house StatementOne data scrubbers clean up the data, finding homes for orphaned accounts. "We start out with 15% more data than portfolio management accounting systems, which all use rep numbers to pull down the data."

StatementOne uses an Oracle database, making it scalable to handle thousands of reps. During a recent tour of the program, StatementOne's Donn Goodman showed me how the application works. It's not fancy, or complex, but some nice functionality makes it look like a practical applications. For instance, the product providers use account names that are indecipherable. So StatementOne lets reps change any account name. You can sort all of your accounts by you clients' Social Security numbers or by their names. The rep can give a client Web access to his account statement with a few clicks.

All accounts listed under the same Social Security number are by default consolidated into a single account statement. However, reps can group accounts for a global view of a particular list of accounts. For instance, if you want to see a consolidated view of all taxable client accounts, you can do so, and keep it private so clients cannot see that same data. Also, a rep can create a consolidated statement for a married couple and allow them to see it.

Goodman also demonstrated how a rep can select any time period to see time-weighted returns on their portfolios, returns that are compliant with standards set by the Association of Investment Management Research (AIMR). While tax lot accounting is not currently possible, Gerber says it should be rolled out in the first half of 2001. Performance benchmarking is also planned for next year, which means that thousands of independent reps --and their clients--will for the first time have a portfolio reporting and accounting system at their fingertips.

A year ago Lou Gerber was on the brink of financial ruin because he had bet everything on his business. But because he worked hard and stuck with it, his vision is about to help independent reps make a major technology breakthrough.

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