February 1, 2001

Three Who Will Make a Difference

Three guys you may never have heard of--Rich Freybe

I love reading those articles in the trade press that name the 50 most important people in the independent advisory business. While it's interesting to see who makes the list, I really like to see is who is not on the list. Those are the people who you really want to know about--the ones flying under everyone's radar, the people who stealthily execute innovative ideas, who quietly drive change in the industry. I'm talking about people like Rich Freyberg, Dave Pett and Dan Skiles.

Freyberg, Pett, and Skiles don't get on those "movers and shakers" lists. They don't write columns in the trade press, run big companies, or give keynote speeches at industry gatherings. But these guys are on the front lines as independent advisor firms battle to grab business from the rest of the financial services industry. They run the technology effort at the institutional divisions of Fidelity, Schwab, and TD Waterhouse.

These are the guys who decide whether you're going to get straight-through processing this year. They're the ones who are going to lead a push to get independent advisors account aggregation, online trading, and more automated services. I spent about an hour with each of them and asked them to talk about their big technology initiatives for 2001.

Before I tell you their answers, let's just put some perspective on how important these three technologists are to the industry.

The independent RIA business over the last decade has been the incubator for the most innovative ideas driving the delivery of financial services in America. Independent advisors are having such great success that Merrill Lynch and Salomon Smith Barney are selling themselves as fee-based planning companies. The giants of the industry want to be like you because independent investment advisors have revolutionized the delivery of financial advice in this country. And what's enabled the independents to win in this David vs. Goliath battle? The short answer: Technology. So the decisions that Freyberg, Pett, and Skiles make don't just influence you and your business. They influence the entire industry.

And that's kind of a funny thing. The firms these three work for are actually responsible for implementing the technology solutions used by a relatively small number of advisors. Schwab does business with about 6,000 advisors, Fidelity has about 900 RIAs and TD is custodian to about 3,000 advisors. And there's some overlap there, with some of the Schwab RIAs also having accounts at TD or Fidelity, for example. But in an industry where there are literally hundreds of thousands of financial advisors, the RIAs that these three firms work with set the standard.

The advisors working through these three firms are the most independent in the independent advisor business. While some of the RIAs working through Schwab, Fidelity, and TD have retained their affiliations with B/Ds, most have no securities licenses. They've given up their Series 7 and other NASD licenses. They have no supervision from a B/D.

That also means they don't have a B/D to make technology and other important choices for them. These advisors must choose their own clearing firm, their financial planning software, and all their vendors without a B/D's help.

Moreover, many of the Fidelity, Schwab, and TD advisors are giving advice on a fee-only basis or are fee advisors who don't get much revenue from commissions. They have developed businesses where they are paid for their advice, not for transactions. So Freyberg, Pett, and Skiles are working with the leading edge of the independent advisor business.

Pleasing these independent RIAs is pretty much impossible. Each of the 9,000 or so RIAs does things differently from the next advisor, and each is certain that theirs is absolutely the right way to do things. So Freyberg, Pett, and Skiles must face the impossible job of satisfying thousands of independent RIAs. It's like herding cats.

Meanwhile, these firms are competing fiercely with one other. Schwab dominates the independent RIA business, with about 75% of market share as measured by assets, according Cerulli Associates. Schwab gained its dominant position by essentially inventing the independent RIA business in the early 1990s by creating a fund supermarket for RIAs and developing technology tools for RIAs to manage funds and individual stocks in subaccounts.

While TD Waterhouse and Fidelity have come up with their own proprietary technology allowing advisors to manage subaccounts through their discount brokerage systems, they have been able to muster only a relatively modest market share. According to Cerulli, Fidelity has about 18% market share of RIA assets and Waterhouse about 4%. In the last couple of years, however, Schwab's technology lead has been narrowed.

Waterhouse created a well-received Web-based account management system. Fidelity has been leveraging technology it creates for its huge clearing business at National Financial Corp., which has about 200 correspondent clearing firm relationships with B/Ds that have hundreds and even thousands of reps in their sales forces. Both firms say they are committed to challenging Schwab.

For all these reasons, I would nominate Freyberg, Pett, and Skiles as the undiscovered managers of the financial advisory business. So let's take a look at the technology initiatives that each is planning for 2001. Since I have to be very careful to be fair to these three gentlemen---they've been kind enough to agree to speak at a panel session I'll moderate at the FPA Retreat in Tampa next month--let's look at them in alphabetical order, beginning with Freyberg of Schwab.

Freyberg is in the midst of phasing out SchwabLink. This is the account management software Schwab advisors use to download account data daily, and it directly feeds data into portfolio management software packages like Advent Axys and Centerpiece. All of the functions advisors now get out of SchwabLink are being migrated to www.schwabinstitutional.com. "Sometime next year, we're going to retire SchwabLink for Windows," says Freyberg.

The retirement of this key application will be phased in. Some of the most important migration will occur in the next few months, but the actual retirement won't happen until advisor management fees can be uploaded to the Web by advisors for deduction from client accounts.

This spring, Schwab will continue the migration of securities trading from SchwabLink to the Web and Schwab advisors will be able to trade fixed income securities on the Web. You'll be able to search through Schwab's inventory and inventory elsewhere. You'll search by the type of bonds you're looking for. And then you will point and click to buy or sell.

The online trading "applet" will also now allow you to trade mutual funds. But there's a wrinkle. Advisors won't be able to allocate mutual fund trades across all their client accounts. While you can trade across all your accounts on individual stocks on www.schwabinstitutional.com, you'll still need to call Schwab's trading desk or fax in trade allocations to that desk for allocation of mutual fund trades across all client accounts.

But there is a solution: Schwab owns Performance Technologies Inc., which makes Centerpiece, the portfolio management system used by over 3,000 advisory firms. This software is especially popular with the small- to mid-sized advisory firms likely to use mutual funds as a principal investment vehicle. Centerpiece is rolling out a new trading module, called genTrade, that will allow trading of mutual funds across multiple client accounts on an automated basis.

The goal of all three custodial firms over the next year is to accommodate straight-through-processing. That means they all want to give you software on your desktop that lets you trade without having to call them and without having you re-key data. For instance, to trade right now, advisors using Centerpiece or Advent Axys often print a rebalancing report and then type the results into Schwab's online trading application. Re-keying the data causes lot of errors and takes time. But genTrade will streamline the process by executing trades directly from your portfolio management software: it will "talk" directly to the Schwab back-end to submit trades into the Schwab trading system. Version 2 of genTrade--to be released later this year--will also work with Fidelity and Waterhouse's systems. Cost: $2,000 a year.

Another big Centerpiece initiative that will begin this spring is a data management service. Freyberg says no name has yet been determined for the service. Basically, this is an outsource service for Centerpiece users.

After the close of business every day, PTI will download your client account data from different custodians, reconcile the data, and upload the newly created Centerpiece data file to PTI's Web server. When you come in the next morning, you'll download the file from the PTI server to your computer. You can then run the updated Centerpiece data on your machine locally. Cost will depend on the number of portfolios and your trading habits, but probably about $8 to $10 per portfolio per month.

This service bureau will not be the same as Advent Outsource or AdvisorMart from TechFi of Denver. Both of those services are geared to advisors who use their Web browser to access their portfolio data. Those advisors don't need to run their portfolio management software on their computers because they're seeing all their data via their browser.

Schwab and Fidelity are also planning to introduce account aggregation for advisors. Firms like Yodlee, By All Accounts, and VerticalOne let consumers log into a page where they get a consolidated statement of all their brokerage accounts at different brokers, plus credit card statements, bank account statements, and other personal financial information.

How does account aggregation work? A consumer signs up to get his account statement online from, for instance, E*Trade. He then also signs up to get his account statement from Vanguard mutual funds, Merrill Lynch, and any number of other brokerage Web sites. When you sign up with an account aggregation vendor like Yodlee, you give them permission to go fetch your account data from your accounts online and you key in all your passwords and user IDs for all your brokerage accounts.

This is powerful stuff. But the trouble with most of the firms doing account aggregation is that they depend largely on "screen scraping." They have robots that scrape HTML Web pages for your transactions, balances, and so on. If one of the brokerages changes its Web page, then the robots get lost and either don't fetch all your data or jumble it. Freyberg says Schwab will be selecting an aggregation vendor in the first quarter and that it will aim for a vendor that predominantly gets direct data feeds rather than relying entirely on screen scraping. On January 10, Schwab retail announced a deal with Yodlee.

Dave Pett at Fidelity Institutional Brokerage Group has an entirely different agenda. For about the last three years, Fidelity has been trying to leverage the technology it creates for brokers at its correspondent clearing firms for use by the 900 independent RIAs. It's also trying to leverage strengths in other segments of the Fidelity empire to benefit RIAs. That strategy is finally beginning to pay off, Pett says.

For instance, Pett says that a new version of Channel, the software advisors run to trade and see positions and balances on their Fidelity subaccounts, is being beta tested. Channel, the equivalent of SchwabLink, has become a much stronger product in the last two years since the introduction of AllocatorPro, which advisors use to rebalance all client funds or stock portfolios and make global trades across all client accounts at Fidelity. Now, the new version of Channel adds a powerful tool: It will give RIAs electronic access to 403(b) accounts custodied at Fidelity.

Fidelity is one of the nation's largest providers of 403(b) retirement accounts, and many colleges and universities offer Fidelity retirement accounts. Advisors generally do not manage these accounts.

"Some of our RIAs will manage 403(b) assets for a client because they have an existing relationship with the client," says Pett. "But many RIAs turn away 403(b) money if they don't have a broader relationship because they do not have a way to manage that money electronically."

The new Channel 6.0 version that is expected to be distributed to a small group of RIAs in February and then go into general release for all RIAs in May will allow advisors to manage 403(b) assets custodied at Fidelity. Instead of having to manually input data about a client's 403(b) into a spreadsheet after pulling in the data from a paper statement, you'll get a direct feed of the account into Channel.

Pett says Fidelity will also leverage the technology it provides its clearing firms by providing RIAs with some of the same research tools it now provides to brokers.

Another big push by Pett is to help commission-based advisors transition their practice to fees by creating technology that supports both compensation methods.

"Basically, we're building the ability to do commission-based trading into Channel," says Pett. Advisors with a hybrid book of business, he says, will receive great support from Fidelity.

For advisors at independent B/Ds that clear through National Financial, this is good news. Instead of managing their commission business separately from their fee business, they can use one platform--Channel.

Pett says Fidelity now ships more copies of its Channel software to reps at the 200 B/Ds using its clearing operation than it does to its 900 RIAs. "Our competition is good at supporting RIAs but they have no correspondent clearing business like we do at National Financial," says Pett. Fidelity, he says, is aggressively moving to help the reps at the B/Ds using its correspondent clearing services to move from commissions to fees.

That's an interesting twist that RIAs with assets at Fidelity need to be mindful of. Just as Schwab has made a business decision to compete with RIAs by buying U.S. Trust and giving advice to high-net-worth individuals, Fidelity is helping competitors to its RIAs.

Other technology solutions Pett says Fidelity is expecting to offer this year will include a system allowing advisors to disseminate content to clients, a focus on building a better tracking system for assets being transferred to an RIA, and opening new accounts online.

"One of the key 'dissatisfiers' in the industry is transferring of assets," says Pett. All three of the custodians say they are building better technology to track the transfer of assets.

Dan Skiles at Waterhouse says this is one of TD's major initiatives. TD Waterhouse Institutional has been beta testing and is about to put into general release for all advisors forms that can be filled in online. Skiles says the advisor will be told whether a form he has filled in was done so completely--not missing the Social Security number, birthdate, or any other required fields.

One of the wrinkles firms are trying to grapple with is that the opening of a new account needs to be approved by a securities principal with a Series 8 NASD license. Skiles says the approval by a securities principal will be built into Veo, which is the online platform used by RIAs to access account information, make trades, get real time quotes, and handle other client management chores.

This will make the account opening process smoother.

Waterhouse Institutional's Veo was the first of the custodial systems to offer everything online for the advisor--including the ability to allocate mutual fund trades across all your client accounts. There is no download of data as there is with SchwabLink or Fidelity's Channel software. Skiles says the new release allows for different users to have different account views. So a person in charge of trading in your office might use a default logon screen that displays executions from the previous day, while someone in operations may want her logon screen to display all checks and securities received the previous day. Each user can have a "myVeo" screen.

Skiles says another initiative aimed at making client data more available to advisors is posting all client statements from the past 12 months on the TD Waterhouse Web server. Other firms mail the old statements to advisors on a CD. Skiles says the next step will be to make archived client statements available on www.advisorclient.com, which is where advisor clients go to check their daily account statements.

Later this year, Skiles expects to release an electronic support service that permits secure instant messaging by an advisor to his Waterhouse service rep. Skiles says that advisors working in Veo often have a question about when a dividend hit or whether cash came into an account. Rather than calling the service desk and waiting for someone to find the answer, an advisor will be able to continue working while awaiting an answer. The secure messages will be archived, so you can always look and see an answer to a message sent a week ago.

Skiles says that more than half of all trades by Waterhouse advisors are being placed over Veo. "This demonstrates that the trading tools we've provided are working," he says. It also points out that advisors will change the way they conduct business if the technology works well.

In recent months, the industry has seen a raft of new online applications for managing separate accounts, handling financial planning, and other tasks that are critical to an advisory practice. The industry has been slow to adopt these new applications. It seems that getting advisors to make major changes in their offices happens very, very slowly. Since advisors are already using the technology platforms of these three custodial firms, the tech trio play an important role in the future of the independent advisor business. I have a hunch these three guys are going to start making those movers and shakers lists in the future.

Where Is Everybody Headed?

Advisors wary of the Web should know where their clients are spending their time online

I am constantly surprised at the slow rate of acceptance of the Internet by financial advisors. Hardly any advisors I know are using collaborative online financial planning applications, while even fewer are using separate account management tools on the Web. Broker/dealers have told me repeatedly that only 10% of their reps have Web sites.

My guess is that advisors are not embracing the Web wholeheartedly because it's really hard to change the way a small firm practices. Also, your clients aren't pulling you there.

That raises an important question: What works on the Web? What personal finance sites do people like? And just how much are the personal finance sites used? I spent some time looking for answers.

Here is some of the most interesting data that I found.

The most popular personal finance destination on the web is America Online's Personal Finance channel. While people who use the Net all the time may look down on AOL, a lot of people get their financial fix there. According to MediaMetrix, the AOL Personal Finance Channel had 11.4 million unique visitors in November 2000.

Those numbers mean that 11.4 million different people went to the site in November, which is different from "hits." If someone hits a site four times in a month, that still represents one unique visitor the way Media Metrix counts it. Media Metrix bases its data by tracking 60,000 people who have agreed to let the firm track their every move on the Web using software. This group's online viewing habits are extrapolated to tell us what the rest of us are doing.

Media Metrix data on visits to other personal finance sites shows that AOL dominates its competition, but the number of people checking out personal finance sites is staggering.

Microsoft's www.moneycentral.com site got 3.9 million unique visitors last November, while www.fool.com had 2.6 million, www.money.com had 1.8 million, and www.quicken.com had 1.6 million unique visitors.

While a lot of people are getting their personal finance fix from sites specializing in personal finance every day, there are many more millions getting their financial fix every day from portals. Shaw Lively, an analyst at IDC, says many investors are getting their online fix at portals like MSNBC, Yahoo, and CNN, and not even visiting pure personal finance sites.

While IDC estimates that seven million American households now use online brokerage accounts, he believes many investors may not be going to their brokers' sites daily to check accounts. Instead they visit a portal site, which might also give them the weather report, local sports scores, and news headlines in addition to a peek at the markets.

"You need your brokerage site to make a trade and get information about your account, but your brokerage site may not be the best place to go to track and stay in touch with your investments," says Lively. "It's another logon, which is a hassle. And you have to worry about security and walking away from your machine once you've logged in."

Lively notes there's a rich set of information available from portals like Excite, Yahoo, and others that may do a better job of serving a consumer's overall needs. Then, there's the bias factor in going to a brokerage site. "People may also prefer to use a portal site because it's not biased," says Lively. "Schwab may be my broker, but when I go to a neutral site, it feels different. It feels like a place with no axe to grind. The portal with general information is not an executor, it's just an information provider."

Lots of people are using AOL to keep up with their stocks and funds every day. In fact, people are apparently crazy for stock quotes. AOL spokesman David Theis says that on an average trading day, AOL delivers 160 million stock quotes. And if you ever wondered whether people use those stock charts, they do. AOL delivers a million charts a day.

Portfolio trackers are also popular. These are personalized charts that display updated portfolio values throughout the day. You have to input a list of securities you want to track, which involves a bit of work, but America Online's Theis says 13 million portfolios are currently tracked on AOL's Personal Finance Channel, with about 20,000 new portfolios added each day.

Despite these impressive numbers, most Americans, like most financial advisors, have not delved much deeper into online personal finance. In its Personal Finance Data Overview for the fourth quarter, Forrester Research reported that while 91% of American households have checking accounts, only 7% of them say they would apply for a checking account online. While 88% have auto insurance, just 4% would apply for insurance online. And while 83% of U.S. households have credit cards, just 10% say they would apply for a card online. Mutual fund owners show the greatest willingness to apply for a fund online, with 14% of the households surveyed saying they would do so.

Consumer behavior in online banking and brokerage sites also supports the notion that people are just beginning to warm up to the web.

Some 54% of American households are offline, and 32% are online but do not use online banking or trading. According to Forrester Research, 11% of Americans are banking online. Of that 11%, Forrester reports that 43% of them pay bills online, 24% transfer funds, and 33% only use the online banking to check account balances. As far as online trading, Forrester says 5% of U.S. households now trade online, with 13% of them only trading in mutual funds, 37% trading in stocks as well as in funds, and 50% in stocks only.

A big reason that so few Americans have delved into online finance is that it is poorly executed. Forrester's Jaime Punishill, in a report issued a year ago, nailed it when he said that online advice needed an overhaul.

Punishill rated 12 automated advice platforms, including Morningstar, Financial Engines, mPower, TeamVest, Vanguard, Wiesenberger, American Express, and Fidelity Investments. These are some of the best sites on the Web, according to the popular personal finance magazines. But Punishill concludes that the sites are too hard to use or too superficial. He adds that the sites generally only handle one dimension of a person's financial life.

"Most consumers have more complicated financial lives, so these solutions leave them with only partially accurate advice," Punishill writes in his report. Yet some of these same sites are too complex to be usable and "many ask questions so laden with financial jargon that the average consumer can't hope to answer accurately."

Yet Punishill says that well-executed automated advice solutions are within reach. Some sites are beginning to move personal financial data into online advice questionnaires. That will make their sites much more user-friendly. A site will go out and fetch your account data and know how much you owe and how much you own by pulling the data from your bank, credit card, mortgage, and brokerage accounts. Questionnaires will get smarter and make assumptions about risk and return based on built-in assumptions about inflation and mortality. Forrester expects that automated advice will "explode" in the next four years and that more than 20 million American households will use an automated advice solution by 2005, growing from an estimated 1.8 million now using automated advice solutions.

As we've said before, advisors should not be threatened by the growing move toward the Internet. For one thing, consumers will be getting there slowly over the next few years. And, more importantly, all the researchers agree that online advice will never replace the human touch. Still, your practice will be changed and keeping up with this dynamic environment is critical.

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