Schwab v. Advent: The Battle Begins

Two huge names serving independent advisors wrestl

The two firms that advisors love and hate the most are at each other's throats.

Charles Schwab & Co. is suing Advent Software Inc., touching off the greatest power struggle ever seen in the independent advisor business. For now, what we are seeing is a spin war as each side seeks to portray itself as acting in the name of advisors. But the outcome is likely to determine which of these two firms in the future will play the pivotal role in thousands of advisory firm back offices.

The legal fight pits two ruthless competitors in the independent advisor industry in a struggle for control over advisor relationships. Schwab's suit, filed on November 8 in California Superior Court in San Francisco, charges Advent with breaching a December 30, 1997, agreement between the two companies. The agreement directly affects RIAs who custody assets at Schwab and use Advent's portfolio management software.

Advent says in the agreement that it will maintain and support a software interface that allows RIAs using Advent software to download client data from Schwab. However, Advent has since launched a new way of conducting downloads, its Advisor Custodial Data (ACD) service. With ACD, instead of taking downloads directly from Schwab, advisors would get their downloads over the Internet from Advent. Schwab says Advent has not fulfilled its obligations under the 1997 agreement by failing to inform Schwab within 90 days that it was changing their deal.

Schwab's lawsuit is cloaked in terms that make it appear to be the guardian of the rights of advisors. It charges Advent has misled advisors and used overly aggressive sales tactics to coerce them to switch to ACD while violating the agreement on their mutual customers. Schwab says that "through the Agreement, Schwab acted to preserve the ability of Schwab Institutional customers to continue using the existing interface instead of being forced to move to, and potentially pay more for, ACD.

"Since then, in fact, many Schwab institutional customers that use Advent's Axys product and the existing interface have informed Schwab that they do not want to move to ACD because it will cost significantly more than the existing interface for functions that they simply do not need." Schwab also charges that "Advent has been coercing Schwab Institutional customers into converting to ACD by offering limited-time, ACD subscription fee discounts if the Schwab customer converts within 30 days of Advent's offer."

The irony of Schwab defending the rights of advisors even as it introduces services that many advisors regard as competitive is equaled only by exhortations from Advent that it is seeking only to create choice for advisors. In an interview the day after the suit was filed, Irv Lichtenwald, Advent's chief financial officer, said Schwab was resisting adoption of ACD because it would free advisors to choose any custodian they want. "An interface is point-to-point between one firm and another, one custodian and one money manager," Lichtenwald says. "Advent Custodial Data is one money manager to multiple custodians.

"What's in the best interest of investment advisors?" asks Lichtenwald. "Is it not to have technology to be flexible and take on clients with new custodians? It's understandable why Schwab at the end of the day may not understand why its clients are better off with state-of-the-art tools."

He adds that "Advent is trying to enable investment advisors to run their businesses in a fashion that they can take on more clients and provide them with the best services they can have and to do this, advisors need state-of-the-art tools. I can understand why a particular custodian may not like that the money managers have more flexibility in growing their business through multiple relationships."

What's happening? Schwab's efforts in the 1990s made it the leader in providing custodial services, allowing it to dominate the business and attract about 70% of the assets managed by small RIAs serving wealthy individuals and small institutions. But technology is threatening to loosen Schwab's grip on the independent advisor business. While Schwab is currently at the center of the relationship with advisors, ACD will put Advent in that pivotal position.

One Among Many

Advent's ACD allows advisors to trade through multiple custodians as easily as through a single one because it has interfaces with dozens of custodial firms. Advent is one of a number of software companies offering this type of technology. Others include TechFi Corp of Denver, Checkfree of Jersey City, New Jersey, and StatementOne of Lawrenceville, New Jersey. But Advent, which is publicly held, is the best funded, has more advisor clients, and a lead over competitors.

While advisors should embrace more choice and greater competition for its business, which is the net effect of ACD, many are reluctant to embrace it because of their love-hate relationship with Advent. Advent has established a reputation for charging high prices for the mission-critical services it provides, and advisors are reluctant to become too dependent on it.

Lichtenwald points out that Advent has frozen prices for Schwab clients who move from the interface software to ACD for 12 months. You'll pay nothing extra if you switch. Advent has also abandoned its initial pricing scheme, which linked the amount of data downloaded to the cost of ACD. He says that advisors should not fear a hike in prices on ACD. "I could understand why people might fan flames of fear on pricing," he says. "But in reality, that's like saying that Advent would build point-to-point interfaces and then charge $1 million a year for them later."

Still, many advisors are reluctant to make Advent the key to their downloads, the central element of their back-office functionality, on a day-to-day basis. For advisors who have just one or two custodians, switching to ACD and allowing Advent to interpose itself as the pivot point for downloads instead of their custodian may be resented. For advisors with multiple custodians, switching to ACD may be welcomed.

For now, advisors who are clients of Advent and Schwab will want to watch the legal action. In a letter dated October 10, before filing the lawsuit, Schwab Vice Chairman John Coghlan asked Advent CEO Peter Caswell not to cease supporting the interface and to get together for a chat. Advent's Brian Bailard, a vice president and general manager, replied to Coghlan on October 30, saying that Advent would continue to support the interface only if Schwab agreed to participate in Advent's data aggregation service, Trusted Network, and pay a $250,000 annual support and maintenance fee for the interface.

A judge could act swiftly to enjoin Advent, or a settlement may be announced. Keep your eyes on www.investmentadvisor.com; I'll update you on further developments as they occur.


Paying Bills, Avoiding Mail

Why advisors should help clients pay their bills, via the Web or the old-fashioned way

My wife was sprawled out on the bed, and not in the good way. "If I don't feel better in the morning," she said, straining to lift her head from the pillow, "I'm going to the hospital."

Mindy normally is well grounded. I'm the crazy one. But she opens my mail (I get a lot of it). And this anthrax thing was getting to her.

I'm a news junkie, and the TV is on all the time in our house, and it started getting to her. Mindy had been coming down with a cold for a couple of weeks, while day after day the media offered anthrax updates. It came to a head that night in early November, when I came home to find her lying in bed. "Go to the hos

pital now," I said. "Don't wait. If you really think you have anthrax, the best thing is to go to the hospital."

Mindy went to the hospital. Thankfully, it was a false alarm. But Mindy refuses to check our mail now. Which brings me to electronic bill payment.

Mindy's fears are extreme. But other people who don't think they have anthrax are scared to open their mail as well. This is an opportunity for financial advisors.

Why should you care about helping your clients pay bills? For one thing, the ability to get data out of bill payment solutions is important. Even for super high-net-worth individuals, it's wise to track expenses. And for advisors who aren't working with clients with multimillion-dollar net worth statements, such data is even more important. Many individuals who earn $100,000 or $200,000 a year are good advisor clients, and they have trouble budgeting and limiting expenses. Any bill payment solution you can offer should provide you with useful data output about expenditures, and excess spending can be cut and aimed toward achieving long-term goals. Plus, the more connected you are to a client, the better it is for your relationship.

The markets are uncertain and many advisors are looking for ways to add value to their client relationships. If you can help clients get bills online and pay them online, you'll be adding value to your relationship. So I spent a few days exploring the options, both low- and high-tech.

Family Office Services

Some advisory firms are helping clients pay bills the old fashioned way, getting bills rerouted to the advisory firm and then assigning a bookkeeper to track them and make sure they are paid.

Joe Kopczynski of Universal Advisory Services in Albuquerque, New Mexico, bundles bill-paying services with his firm's family office services. Universal's family office services fees are based on net worth and not assets under management. The fees are on a sliding scale starting at 1% and declining to 15 basis points for individuals with a net worth of $50 million or more. "We do everything , right up to signing the checks," says Kopczynski.

While Universal and many other RIAs have a limited power of attorney allowing them to make changes in a client's portfolio, signing checks would require another type of power of attorney. It would also mean that the firm is effectively taking custody of a client's assets, and that would trigger additional regulatory burdens not now fulfilled by most RIAs, including the need for an audit annually. "If a client is vacationing in China, we will send them a Fed Ex in Beijing with their bills attached for their review and the filled-in checks for them to sign," says Kopczynski.

Bill paying is only one part of the firm's family office services, but it allows Universal to match concierge services offered by large trust companies while maintaining personal relationships with clients . About 10 clients, all with a net worth in excess of $5 million, use the bill payment service.

Kopczynski says his firm receives all the invoices instead of the clients, or it helps the clients arrange for automatic debiting of expenses. If a client asks for it, Universal will review bills to look for big jumps in expenses or unusual account activity. Steve Sparks, CPA, the tax manager who is responsible for the service, says that although Universal is not an accounting firm, it does some accounting work for this select group of clients. "Our responsibility is to make the lives of these people as good as we know how," says Kopczynski. "People with wealth travel a lot and lead complicated lives. Bill paying, the way we do it, is just one thing we can do to make their lives better and give them peace of mind."

Just Outsource It

Advisory firms interested in adding these types of services can also outsource them. Total Personal Services Administrative Group, LLC, of Garden City, New York, was founded in 1993 by NancyAnn Akeson's father. Akeson's father had built a successful company tallying proxy votes for publicly held companies and was bought out by a public company. Akeson says her father looked around for help in managing his personal stuff--opening the summer house, making sure the yacht was ready and in the right spot, and paying bills. When he could find no company providing these services, he started TPSAG, which NancyAnn now runs.

TPSAG takes the place of a personal assistant for about $500 a month (TD Waterhouse Institutional Services includes TPSAG in an affinity program, which gives the 1,500 RIAs using its custody service a 20% discount). TPSAG will take delivery of all mail for a client. Akeson says that about 60 wealthy families with between $2 million and $800 million in net worth are using its services.

TPSAG will review your bills and pay them for you via a checking account set up specifically for paying monthly expenses. TPSAG is not an RIA, and the firm is not regulated tightly by the government, as is the investment advice business or even the accounting profession. It does, however, get a power of attorney from clients that permits it to sign checks, and it does submit to annual audits by an accounting firm. Bills are scanned by TPSAG and faxed or e-mailed to clients for verification. On a quarterly or annual basis, clients receive a CD with all their bills, plus a hard copy summarizing all expenses. Advisors can receive a copy that breaks down all expenses. In January, TPSAG expects to begin electronic exports of the data, allowing the advisor or client to import the expenses into Quicken or Excel for analysis.

The Quicken Solution

For advisors who like the idea of helping clients pay bills but who don't want to become directly involved by taking the job in-house or overseeing an outsourced service, assisting clients with electronic bill payment is a good alternative. Ross Levin of Accredited Investors Inc. provides clients with Quicken software, and sets them up on the program. He also assists in their getting a Quicken credit card, which makes it easy for a client to track all his expenses and still receive frequent flier miles for purchases. While cash spent after an ATM withdrawal cannot be tracked, Levin says his way of helping clients pay bills electronically gives him access to important data about expenditures.

Electronic bill payment has problems, however. The main problem has been a lack of mainstream users. David Fontaine, spokesman for Checkfree, the dominant company in electronic bill presentment and payment, says that 5.6 million consumers pay bills online through companies using its service, which include banks, credit unions, brokerages, and portal sites such as Yahoo! and Quicken. Fontaine says the number of users has been growing 40% a year, but this is coming off a small base and not everyone is convinced that electronic bill presentment and payment is ready to penetrate the early-adopted market.

Kenneth Clemmer, a senior analyst at Forrester Research, a leading Internet research firm, says usage of EBPP went from 2% of households in January 1999 to 7% in January 2001, and he projects 13% of households will use EBPP in January 2002. "But after that it will plateau," he says. "Only a small amount of the population are early adopters."

Jason Briggs, an EBPP industry analyst at the Yankee Group in Boston, says that the low adoption rate has made it hard for EBPP companies to turn a profit, and that's left the smaller companies in the industry reliant on venture capital funding, and has hurt the stock price of industry leader Checkfree, which traded recently at $14 a share and was down from its price of over $100 two years ago.

Briggs says the problem may stem from the bill presentment side of the business. If you want to pay your bills online, there's a good chance that you'll be using a Checkfree interface. A few banks, such as Citicorp, have created their own systems, but Checkfree is most widely used. While the portal sites such as Yahoo! and the U.S. Postal Service are offering bill paying, most people rely on their bank's system for paying their bills, Briggs says. Trouble is, the banks show you your checkbook, but they usually do not offer bill presentment. You can cut checks electronically at your bank site and you can see your checking account balance, but you generally cannot receive the bills there.

Many large companies have created their own bill presentment sites. A consumer can go to the power company and sign up for electronic bill presentment there, or do the same with a telephone company or cellular phone carrier. In most cases, the companies email you to notify you to go to a secure Web site to pay the bill. But the landscaper who mows your lawn, the masseuse who rubs your back, and other small vendors, including many credit card companies, still do not have online bill presentment. You won't be able to receive all those bills online and get a complete data dump that allows you to easily monitor expenses.

Paytrust's Promise

The EBPP option that is perhaps my favorite for the majority of advisors is to use a service called Paytrust.com, a Lawrenceville, New Jersey, firm with 300 employees dedicated to scanning bills for 100,000 clients.

After speaking with the company and viewing its online demo, I went to www.epinions.com and did a search for information about Paytrust. More than 40 reviews of Paytrust were accessible; all but a few recommended the service, and the great majority were strong recommendations.

The real clincher for me came, however, when I called Advanced Capital Strategies and spoke with Derek Tinnin. ACS, a planning firm in Cincinnati, was founded by Michael Chasnoff, a down-to-earth planner who worries about details. When I asked Tinnin if ACS helped clients pay bills, he told me that they had just started using Paytrust. The decision was clinched after Tinnin used the service for several months.

When you hire Paytrust, it contacts your list of payees and asks them to send all bills to a New Jersey address. Paytrust scans the bills and you can access them online anytime. They also use optical character recognition (OCR) to convert the text in the scanned images into data you can use. This can give advisors the data feed they need. When you OCR a document, a scanner extracts the text and turns it into data that can be uploaded into the Internet, imported into Quicken or Excel, and manipulated for your analysis. For $20 Paytrust will cut a CD for each of your clients at the end of the year with pictures all of your bills and an aggregation of the expenses. Paytrust charges $4.50 a month, plus 50 cents per transaction, or you can pay a flat fee of $12.95 a month for up to 30 transactions. This is small change for advisor clients.

Using EBPP is easier in many ways than dealing with paper-based checkbooks and piles of invoices. And helping clients implement EBPP will undoubtedly make relationships stronger. While most people are not as fearful as my Mindy, I have a feeling that at least for the next few months most people will be happy to receive less mail.


Targeting Advisors

Now planners can use a Nobel laureate's Monte Carlo simulation system

Financial Engines is setting its sights on advisors, and it will set a new, higher standard for giving portfolio advice and elevate the financial advisor profession.

While the dot-com landscape is littered with wreckage, FE is one of the few companies to have survived. Founded by Nobel economics laureate William Sharpe in 1996, the Palo Alto, California, firm is advancing Web-based delivery of financial advice to 401(k) participants. The privately held company raised $120 million in venture capital funding from backers including American International Group, Chase, E*Trade, Goldman Sachs, Merrill Lynch, State Street Global Advisors, and Wells Fargo. It still has $40 million left over, says Jeff Maggioncalda, FE's president.

FE's application for making investment projections has been rolled out by 585 401(k) plans, which pay from $10 to $15 per year per employee. Merck & Co., Motorola, Hewlett Packard, Hallmark, and Clorox are among the companies using FE to deliver 401(k) advice to about 1.8 million plan participants. Last summer, Florida, which is allowing its 650,000 state employees to opt into a defined contribution plan and leave the state's defined benefit plan, selected FE as its Web platform.

Modeling the Future

Maggioncalda says FE's total revenues went from $300,000 in 1999 to $3.8 million in 2000 and are expected to hit $10.5 million in 2001 and at least $20 million in 2002.

FE is a Web-based application for modeling the future of a portfolio. It won't do tax planning, estate planning, or portfolio reporting. Not yet, at least. But what the team of nerds assembled by Sharpe has done is create a killer sales tool.

At the heart of FE is Monte Carlo simulation. Many advisors use historical data to project future returns. Basically an advisor might tell a client that stocks historically give you about 11% a year and bonds will give you 7% a year, and based on those historic returns, you can expect your portfolio to be a certain amount in the future. Monte Carlo simulations show how hopelessly na?ve these assumptions are.

It allows for the fact that when you invest in a stock or a bond, interest rates may soon plunge or rise, inflation could change with it, and a drop in stock prices might occur the day after you invest. Monte Carlo simulation shows you how your portfolio is likely to behave by running thousands of scenarios instead of assuming a single rate of return. If you want to invest a portfolio for 30 years, it will run thousands of different scenarios for that 30-year period--some with high returns in the early years and low interest rates, and some scenarios with just the opposite variables. The simulations run by FE even take into account the interactions between asset classes over time. When inflation is high in a given year, it has an impact on bond yields, for instance.

What's best is that the simulations produce a likelihood of success of a portfolio. An advisor tells a client that his portfolio as it is presently constructed has a 60%, 70%, or 80% chance of achieving a targeted investment amount. This is a way of explaining investment risk that clients can understand. It helps clients have more confidence in your relationship because you are showing them that they may not meet their goals. When the market goes bad, as it has in the last couple of years, clients are less likely to leave because you've all along modeled the possibility that their portfolios will behave poorly through some periods.

We Test-Drive the Engine

To test how advisors would like the program, FE led a 90-minute WebEx demo session for eight advisors I chose. The participants ranged from fee-only financial planners who use Excel and other modeling software to produce homegrown Monte Carlo simulations to registered reps that have heard of Monte Carlo but have never seen how it works.

Advisors with a great deal of experience with Monte Carlo worried that FE is a "black box." They included Glenn Kautt of The Monitor Group in Fairfax, Virginia, whose new book, Stochastic Modeling: The New Way To Predict Your Financial Future, explains Monte Carlo simulation to consumers, and Michele Schaff of the Ardor Group who uses the simulations with all clients. "These guys have a real interesting product and there is a massive amount of technology here, but I am worried about how you get from the initial assumptions to the output of recommendations," says Kautt, whose firm sponsors a Web site where such matters are debated at www.montecarlosimulations.org. "The black box has always been a concern for professional advisors. How do I know what assumptions are being made and whether the output is the most efficient portfolio unless I am thoroughly versed in not just using the product but in understanding how it works?"

Despite such critical remarks, the advisors who participated in the demo of FE's new planner product said it would improve the profession and make most advisors better at constructing portfolios. "It absolutely can improve most advisor practices, specifically those at the level of not using advanced portfolio development software," says Kautt.

An advisor or broker/dealer--and make no mistake, FE will be trying to sell independent B/Ds on making the program available to their entire network of reps--can define a universe of securities that can be incorporated in portfolios. The program currently builds portfolios with stocks, bonds, and mutual funds.

Your risk tolerance is determined in a standard questionnaire or in one the advisor authors, and questions about a client's goals are also answered. Once you build a portfolio, a panel on the right side of your screen displays the likely outcome. For instance, if your goal is to accumulate $160,000, the right side of the screen will show you that there is a 70% chance of succeeding. A client can also have multiple goals--buying a home, funding a child's wedding, and retirement. The advisor navigates different goals on a pulldown menu and can then see how likely the portfolio is to achieve that particular goal. Also shown is "value at risk," which shows your possible one-year loss.

What's most effective about the program can also be its greatest shortcoming. Unlike other Monte Carlo products, FE uses specific investments. That will make it a great sales tool, but it will be less useful to investors if the universe is limited to a particular brand of products. Still, the simplicity of FE Professional Advisor is likely to make your practice more efficient. Until now, only elite advisors have employed Monte Carlo analysis because it's complicated and there's no nifty way to display it to clients. FE's advisor product will change that, and that's why it's an important entrant to the professional market.

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