A Heck of A Show

Getting on an airplane and going to Schwab's Impac

It was less than a month after the World Trade Center terror attack and the second day of U.S. air strikes against terrorists in Afghanistan, and there I was: 36,000 feet over Cleveland on my way to the Schwab Impact 2001 conference in Seattle.

My wife didn't want me to go. Heck, I didn't want to go. But now that I'm up in the air, my fear is gone. To be honest, I'm not sure exactly why. The increased security at Kennedy Airport when I left New York seemed like more of a nuisance than anything.

I was told by Schwab's travel people to get to the airport two hours before my flight was scheduled for takeoff. The lines were long but they moved much faster than usual. It took about 20 minutes to get through the line to check in and get ticketed--that would not be bad for a New York airport even in pre-September 11 America.

The most visible difference in security at the airport appeared to be that the bag I checked was X-rayed. In retrospect, it's amazing to me that they weren't X-raying every bag before this terrible mess.

The other big change was that soldiers carrying rifles were patrolling the airport. The presence of the National Guard troops seemed like more of a show than anything else. Those guys are going to meet a lot of women, but I don't think there's much else for them to do. Everyone at the airport was talking about a New York Daily News story in which reporters smuggled weapons onto planes right past airport security. Having the National Guard walk around with guns at the airport won't stop that.

Happily, the flight to Seattle was uneventful. To be honest, however, America has quite a way to go to make people secure from terrorism.

My family and I went to Israel in August 2000, just a few weeks before the start of the second intifada. It was a time of great hope, when there was calm between Palestinians and Israelis. Israeli security, even during that period when terrorism was less common than it's been in recent months, was much tighter than it is in these fear-filled days in the United States.

When you walked into a shopping mall in Israel, for instance, a guard at every entrance searched through your bags. Even if the guard comes to know you because you go back in and out of the mall every day, your packages get searched each time.

When I entered the convention center in Seattle to attend the Schwab conference, I carried on my back a heavy, bulky computer knapsack. I strolled in and nobody checked my bag.

They checked my ID when I got up to the fourth floor registration desk, but by then I could have walked into another section of the building without a problem. I was told later that Schwab had decided to conduct random searches of bags. Sadly, I think Americans are going to have to get much tougher on security because you just know that these madmen are going to try and come at us again and kill more innocent people.

People from the West Coast just don't get it yet. Easterners, New Yorkers in particular, seem to have been much more affected by the attacks. I don't want to make it seem like we in the East have a corner on the grief, fear, and pain caused by the events of September 11, but I do think that we've been scarred to a greater degree than other Americans.

Despite my concerns, I'm really glad I attended Impact 2001. This was probably the best of the five Schwab conferences I've attended, and I think that the people who attended the show felt the same way. The fact that only 502 advisors showed up, compared with the 1,200 advisors who showed up in Denver at Impact 2000, actually made it better, at least in my opinion.

Apart from enjoying the smaller, more personal conference, there are more important reasons I'm glad I went. On a practical level, getting back to traveling again in post-September 11 America was like jumping into the water. Once you're wet, it's okay; you're done with the hard part.

Still, I have to admit that when America started attacking Afghanistan just 24 hours before I was scheduled to leave, I thought about backing out and hoped Schwab would cancel the conference. And that's the main reason why I am glad that I got on an airplane and went to a convention.

Keeping Things in Perspective

While I think performance reporting software and service bureaus (the subject of the panel I moderated at the show) are really important, and while I love to talk with advisors about insurance trusts and incentive stock options, we all know that these things matter little in the grand scheme of life. And one of the few good things to come out of the terrible events of September 11 is that more people are remembering the really important things. It is with that sense of proportionality and perspective that all of us are going to have to carry on with our lives and businesses even as we expect other terrorist attacks, and that makes all of us a bit heroic just for showing up at a conference.

Months earlier, I had agreed to moderate the panel on performance reporting software. With my history of covering Schwab in a way that hasn't always endeared me to the company, I really wanted to moderate that panel. You see, Charles Schwab (the man, not the company) personally barred me from attending his press conferences three years ago after I accurately quoted him making a brutally honest but profane remark about wirehouse brokers. I've also written stories over the years detailing incidents when Schwab retail inappropriately contacted advisor clients, which resulted in policy changes at Schwab retail. While Schwab executives seem to like me because I've always been fair and accurate, they cannot help but look at me warily. So I was genuinely flattered by the invitation to moderate the panel, pleased that Schwab was recognizing that I'm an okay guy, even though my coverage is often not in line with the company's wishes.

Now, maybe the spirit of solidarity that's sweeping the nation is getting to me, but I have to do something I don't often get the opportunity to do: praise Schwab. The company boldly pushed forward with the conference, even though the air strikes against Afghanistan began the day before it was set to start. Schwab scrambled at the last minute to book speakers like former Secretary of State George P. Schultz and former CIA Director Brent Scowcroft, who could address issues in post-September 11 America. Schwab also asked speakers on investment and personal finance matters to shift the focus of their previously prepared remarks to reflect the new realities. Schwab cut its planned five-day conference back to three days after the terror attacks, reduced attendance and exhibitor fees, and offered everyone who had signed up to attend before September 11 a refund. It would have been much easier and quite understandable to cancel the show.

No-Shows

About 750 advisors were signed up to attend the conference when the attack on lower Manhattan occurred. By Schwab's estimate it's likely that about 950 or 1,000 advisors would have attended the conference by the October 11 start date if the attacks of September 11 hadn't occurred.

This would have been fewer than the 1,200 advisors who had gone to Denver a year earlier, and the growing roster of competing conferences might have been responsible for reducing the number of attendees. But more likely it was the slower economy and big losses in the stock market in recent months, which surely makes it harder for advisory firms to justify emptying their offices and leaving their clients to spend money on traveling to a conference.

Impact 2001 was supposed to be quite different than any of the previous 10 Schwab conferences. It was supposed to be a five-day conference: the first two days would address back-office issues, the last two days would be for investment advisors, and a day in the middle would be for both groups. The price: $850 to attend the first three or last three days of the conference, or $1,050 to attend all five. After September 11, however, everything changed.

The FPA Success Forum, the largest industry gathering of the year since the merger of the Institute of Certified Financial Planners and International Association for Financial Planning, abruptly canceled its conference in San Diego, which had been scheduled to start a day after the World Trade Center disaster. Of course, commercial air travel was grounded for several days after the attacks, and when planes initially started flying again they were mostly empty. People were depressed and unhappy and doing business almost seemed like inappropriate behavior.

Schwab, in the grim days following the attacks, used the Internet to conduct a survey of advisors and exhibitors who were registered to attend, and asked them to make a decision within 24 hours about whether they wanted the show to go on.

When the answer came back, according to Debby McWhinney, who runs Schwab Institutional, an "overwhelming" number said they wanted Schwab to move forward.

"There are always good reasons not to do what Stephen Covey [the author of Seven Habits of Highly Effective People] calls 'sharpening the saw,'" says Curt Weil of Weil Capital Management in Palo Alto, California. "I'm in the middle of switching from Advent Axys to Centerpiece, we just started quarterly billings on October 1, and I teach Financial Planning 101 to CFP candidates at the local college and had to skip Tuesday's class. You can always find excuses not to take time away from the daily stuff in running a business to rub elbows with the best and brightest in the industry, and find out what's new in the marketplace and avail yourself of research you could never afford to buy on your own."

Uh, Curt, isn't the threat of terrorism a really good excuse?

"I'm not going to let those sons of bitches ruin my life," Weil says.

How's Business? Pretty Good

The 502 advisors who turned out for the conference were a smart bunch. As I walked the exhibit floor past the 200 booths for two days, I must have had conversations with 25 advisors in which I asked, "How's business?"

The answer among almost all of them was "pretty good." I was shocked. It has been my experience that advisors, as good small business people, won't ever say things are lousy, so I really tried to probe. The people I spoke with were able to give me convincing details that indicated to me that the industry is faring pretty well despite the national tragedy and 20-month bear market.

One of the most poignant stories came from an advisor named Steve Check of Check Capital Management in Costa Mesa, California. Check managed $345 million in client assets going into the bull market rally of 1998. He's a strict value investor and when growth stocks ran up out of control, he refused to buy into it. Instead, he stuck to his strategy and let some of his clients leave.

"Clients left because I wouldn't play the bubble," says Check, who's now attended all 11 Schwab conferences. "I couldn't do it because I felt then that what has been happening over the past year and a half had to happen. The question basically was whether it would happen before I went out of business."

Check's assets declined to under $100 million as clients deserted him. But things have since turned around. Check now manages $160 million and many of the clients that left have returned. "And now I have the track record," he says.

Check's story was my favorite, but just about every advisor that I spoke with at Impact 2001 was doing pretty well despite the market's precipitous drop. "I told my clients that there could be a 100-year event at anytime," Libby Mihalka of Altamont Capital in Livermore, California, told me.

Deb Wetherby, whose firm Wetherby Asset Management in San Francisco manages $550 million, says she had established a hedge fund of funds in August 2000 for her clients to go long and short, so she was well prepared. "We got six referrals from existing clients last week," she says. "Our worst portfolios are down 15% and our best are down 3%."

Stu Zimmerman of BAM Advisor Services in St. Louis says the uncertainty has been great for business. Zimmerman, who runs his own investment firm that manages $400 million as well as $1 billion that is managed for about 100 CPA firms, says not a single client called after the September 11 attack to sell out.

Ill Will?

Dave Pottruck, president and co-CEO of Schwab, opened the conference and wasted no time dealing with the big issue challenging Schwab's continued success in the advisor business. The firm's hegemony over the RIA market is being threatened by the ill will generated as some advisors have come to believe that Schwab has gone too far in competing with them. This has been a nagging issue for years, but it has become more acute in the last two years, with Schwab's acquisition of U.S. Trust and the company's launch of new services providing advice to high-net-worth individuals. Growing competitive pressure from TD Waterhouse Institutional Services and Fidelity Institutional Brokerage has grown as well.

"It's important for me to address questions and concerns that threaten to get in the way of our relationship," Pottruck told the attendees. "We need to deal with this question of trust."

Pottruck assured advisors that "You are extremely important to our company."

Advisors manage close to 30% of the $840 billion in assets at Schwab, which is held in 10% to 15% of Schwab's total client accounts. Pottruck traced the beginning of competitive fears back to the introduction of the Select List about a decade ago, and said tension mounted with its 6,000 advisors after Schwab began marketing its own mutual funds, and then introduced a fund of funds.

"And as you know, we certainly heard concern from advisors over our merger with U.S. Trust and, more recently, with the introduction of Services for Private Clients," Pottruck said. "Some of you may see this as a continuing series of annoyances over 10 years. But we see it as our ability to elevate our services as we listen to our clients and the result is incredible asset growth that we, and you, have enjoyed that is the envy of the entire investing world."

Pottruck was blunt: "It doesn't make sense that we would cannibalize your business." He says Schwab is about to unveil new retail initiatives and seemed to be preparing advisors for the possibility that this, too, would appear to encroach on advisors' turf, despite the fact that these new services are likely to be geared to less wealthy retail clients.

"Our biggest source of lost business is not big discounters," he said. "It's the full-commission firms that charge more, not less." He said Schwab will be testing a lot of new products, "and you'll hear about them in the advisor press, no doubt beneath some sort of scary headline proclaiming we're after your clients."

"We simply are not going to try to steal your clients," he promised.

Pottruck made a good point that explains why it will be hard to topple the firm's position in the RIA market. "The others just don't have the scale of investment that we do," he said. Unless the competition steps up with some heavy investment, they will have a hard time matching the size of Schwab's commitment supporting advisors.

Why You Are Important

Maybe the reason that Pottruck's comments were so pointed is that advisors really are important to Schwab right now. Fidelity has been making a push, as well as Waterhouse, and they both are claiming some success. Schwab stock has been decimated and rumors are flying about the company being a takeover target. Meanwhile, retail investors aren't even opening monthly statements and hits on Schwab's retail Web site are down 40% from the site's peak. With this backdrop, Schwab's advisor business has been remarkably stable.

Net new assets through August 31 totaled $56.8 billion, according to Schwab. Of that, $18.4 billion has come from advisors. That's 32.4% of the total inflow of net new money coming into Schwab, which is above the 30% of assets held at Schwab and managed by advisors. In other words, the share of new assets coming into Schwab because of its advisors has grown this year.

Dan Leemon, chief strategist at Schwab, did his usual job presenting feel-good data for advisors. Leemon breaks investors into three types: delegators, validators, and self-directed. Delegators want advice; self-directed people do not; and validators want research but want ultimately to be in control and make their own decisions. Every year at Impact Leemon presents data about investors, making the case as to why Schwab is not seeking the same clients as advisors, who market to delegators.

In his presentations, Leemon deftly intersperses videos of Schwab clients speaking in focus group sessions. Because there's just one camera used to videotape the sessions of the consumers, it gives you the feeling of a hidden camera and that you are eavesdropping on these conversations. Advisors in the audience get a voyeuristic thrill from hearing the comments by investors, who invariably say that wirehouse brokers are bad.

I was all set to tell Leemon that I thought his act was getting old when I sat down with him for an interview. But then he hit me with some convincing arguments.

Schwab's New Strategy

Leemon concedes that Schwab has "reoriented" its strategy and is now angling for validators, where it once went for self-directed individuals only. He argues that even Schwab's new Services for Private Clients program is not going to compete with advisors.

Apart from U.S. Trust, PCS would appear to have the most overlap with RIA-offered services. PCS, which has opened in six pilot locations, has finely appointed offices that are staffed with CPAs and CFP licensees who generally have at least eight to 10 years of experience in financial services.

"It's not Wal-Mart," Leemon concedes. "But if you look at the number of clients per registered broker, the amount of call center and Web services we have to provide in the offering to make it work, it's a whole different feeling from an expert advisor who's been in business for years and gives a much higher level of hand-holding."

Leemon says each rep in the PCS offices has 200 clients. The target client for PCS is a validator.

"We had a big realization a couple of years ago," he says. "We have to stop telling people we can't help them with their stocks. We saw that advice was the killer application for delegators.

"Commission brokers have high costs and closed architecture," says Leemon. "The investment banks like Goldman couldn't get their minimums down low enough and still make money. So we looked at this $500,000-and-up [in assets] validator and said there is no one who has landed smack in the middle with the right offer, and PCS was designed initially as a test to see if we could deliver one-on-one services to validators. That is the test under way."

Leemon says Schwab's core business is serving individual investors in the United States directly and through investment advisors. Furthermore, he says that all of the segments across Schwab's offerings provide about the same amount of profit for every dollar invested.

"Yes, we get a higher fee and revenue line per asset dollar in some businesses versus others, but you don't have costs going into the others," he says. "The percentage of profit you make on a revenue dollar across our high-net-worth clients, advisor business, U.S. Trust, or Schwab retail is very similar--to the point where as a corporate executive, I don't look at those." Leemon says the profit band is within five percentage points.

"We don't have a corporate incentive to have an investor go one place or another," he says.

The Software Shootout

My session was okay, but the software vendors on the panel were too polite, too nice. The four vendors were Advent, Centerpiece, Checkfree, and TechFi. I'd ask a question like, "Please tell us who your main competitor is and why you are better," and they refused to take the bait. The four men on the panel tell me this stuff in private conversations all the time but were reluctant to slug it out in front of the 340 people in the room. At times, I felt like that mean British woman on The Weakest Link.

With the dot-com disaster of recent months, these four companies are struggling to figure out where to go. They're unsure about how to use the Internet to serve you better, and they all seem to be groping for an understanding of what advisors and their clients need.

For instance, Steve Winegar and John Norwood of Performance Technologies Inc. were giving me an overview of the industry a few days before the panel discussion. They started by explaining that "Web-based client presentation is becoming more important and more desired." So I asked them to prove it. They didn't have an answer.

I've been hearing that Web-based portfolio reporting and service bureaus were taking over the industry for close to four years now, and just don't buy it anymore. For instance, Centerpiece has been offering a Web-based client reporting package for about three years called e-Reports. But the company says that only about 5% of its users have bought it.

Advent says it has had a bit more luck and that about 20% of its licensees are providing Web-based reporting to clients. This is not surprising, since a lot of the Advent users are bigger institutional shops and deal with more tech-savvy, performance-conscious investors. Advent's service bureau, Advent Outsource, has been available for many months now, but Advent's Steve Lewczyk says that only about 20 firms are using the service bureau.

About the only Web-based service bureau that seems to be getting any traction is TechFi, which says that about half its sales are of its AdvisorMart service bureau and the remainder are for its software. But while AdvisorMart is the price leader, it only has about 120 advisory firms on its system, according to Matt Abar, the firm's CEO.

Please understand. I do believe that one day the Internet will be the only way your clients will get their reports. But that day may be a few years off. In the meantime, smaller RIAs don't seem to be clamoring to deliver portfolio reports online and the Web-based service bureaus are getting off the ground much slower than expected. Of the 340 people at my session, only about a half dozen raised their hands when I asked if they would be interested in moving to a service bureau. Yet all of these vendors are scrambling to offer Web-based service bureaus. In fact, CheckFree doesn't have any software; it is only available as a service bureau, but it does promise to be a formidable entrant in that space.

I think that for the service bureaus to really become popular, the B/Ds are going to have to roll them out to reps. TechFi, along with StatementOne (the company that offers a Web-based consolidated financial statements for advisors and their clients), is moving through this channel. After a few big B/Ds start using them and a few thousand reps are on the systems at these companies, the economics and experience will allow these firms to sell more effectively to independent RIAs.

In the meantime, confusion seems prevalent among the vendors. When I mentioned the muddled state of the industry, Steve Lewczyk of Advent Software didn't argue. He agreed that this is a time of great transition for technology and Advent is trying to figure it out. If Advent, which is publicly held and has 750 employees, is no longer trying to convince us it that has all the answers, you can imagine how the smaller technology players are doing.

Who Trusts This Network?

For instance, Advent has been trying to get its Trusted Network up and running for months. This is Advent's version of account aggregation. Account aggregation was a hot topic as the Internet bubble was forming.

With account aggregation, you'll be able to see all of a client's holdings--even money you don't manage. So if you have a client with some money at Merrill Lynch, for instance, the client can sign off to let you take a download of data on those assets and you can include it in your portfolio report.

This would be great for advisors. Imagine being able to see that the Merrill broker just took big losses and that you can take some gains, and coordinate all of the client's tax selling. So far, however, few RIAs are using Trusted Network and not enough of the key custodial firms that RIAs care about have signed up for Trusted Network.

Fidelity, Schwab, and Waterhouse, as well as the retail brokerage side of Merrill Lynch and Salomon Smith Barney, have not joined up. These firms just don't trust Trusted Network. In other words, Schwab so far has not been comfortable enough to get on board and provide a download to Advent that would make client data available to Merrill brokers. It's a game of, "I'll show you mine if you show me yours," and it may take many more months for all the main brokerages to be willing to play. By the time that happens, other technology solutions will probably emerge.

But let's not pick on Advent. Let's look at Centerpiece. This portfolio management software package, which is made by Performance Technologies, a unit of Schwab, is having problems figuring out how to incorporate the Web into its product suite. Earlier this year, the company told me it was planning to release e-Reports Live, and I wrote a couple of pieces mentioning its plan. Now Centerpiece says e-Reports Live is on the back burner. PTI is working on another solution.

That new solution is called CoWorker, a service bureau. Already PTI is taking downloads and reconciling data for 20 users in a free pilot program. But the product won't be released until next summer.

CoWorker will allow Centerpiece employees to take your downloads and scrub your data using a new version of Centerpiece. Taking a page from TechFi's Portfolio 2000, Centerpiece is moving to a Sequel Server database. Users of Centerpiece will import their data into the newly re-engineered version of Centerpiece, which should run faster and be more scalable. That new version will be used by PTI to run CoWorker.

While I could not get the panelists to lob any grenades, Schwab executive Nick Georgis, the head of sales at Schwab Institutional, launched a Cruise missile directly at Advent.

Schwab vs. Advent

"I have a comment I'd like to make, given some of the comments made during the presentation," Georgis said during the Q&A session that followed my panel. "My name is Nick Georgis, I'm with Charles Schwab Institutional. I'm the senior vice president in charge of sales and relationship management with all of our clients."

At this point, I'm figuring that Schwab is about to attack me. I'm up on the podium figuring that I've been too abrasive in trying to draw out the panelists and that Georgis is going to disown anything to do with me and apologize on behalf of Schwab for asking me to be the moderator. Instead, Georgis blasts Steve Lewczyk for Advent's decision to stop supporting its interfaces with custodians beginning in 2002.

Right now, Advent users have an interface that they buy from Advent. There are interfaces for Fidelity, Schwab, and many other firms. They're used by advisors to download their client data. Advent is going to stop selling interfaces and supporting any problems they may give you.

Advent wants everyone to move to its new Advent Custodial Data Service instead of using the interface and says it's going to leave prices the same for ACDS as they are now for the foreseeable future. The move interposes Advent in advisor downloads from custodians and this has the custodians furious. From their point of view, it's your data and your performance reporting software vendor shouldn't make money on your downloads.

Advent says ACDS is a good thing for advisors with multiple custodians and that it will launch other new products connected to ACDS that will make your life better. Still, advisors fear that Advent, which has a reputation for treating small advisors harshly and charging for every little thing that it can, will use ACDS to make advisors completely dependent on them and that Advent will ultimately raise prices sharply for ACDS users.

All the Advent users in the room, about 75, are listening as Georgis speaks out. "I bring this up because many, many clients have called to ask me a lot of questions about the point-to-point interface," he says. "And the fact that Steve has made comments about not supporting the interface--I can't comment on whether it's an upgrade or a conversion--but many clients say they don't feel like its actually an upgrade. I can tell you that Schwab believes that Advent must support the point-to-point interface through the year 2002, and that we hope to have a solution for you before the end of 2002 that might solve your point-to-point problem.

"We would like to give you your data for free through a point-to-point interface," he added. What's happened is that although Advent has been saying that it will stop supporting its interface with Schwab at the end of this year, Schwab is saying it has some reason to believe that Advent must support the interface for another year.

The room breaks into applause. People are cheering. Finally, some fireworks! And it was at not my expense. I was thrilled.

Yeah, I was glad I got on the airplane.

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