Come Closer, Says Schwab

Schwab Institutional hopes to forge even stronger

With technology freeing advisors to trade with multiple custodians, Charles Schwab Institutional is fighting back.

Schwab, which owns Performance Technologies Inc., maker of Centerpiece, a portfolio management and accounting program, says it will stop selling Centerpiece to advisors who don't do business with Schwab Institutional. Schwab is more closely aligning Centerpiece and all the technology it builds for advisors with Schwab Institutional. The strategy shift comes as technology continues to make independent advisors less dependent on Schwab. (See below the e-mail announcement Schwab sent to advisors.)

Schwab has been the dominant custodian for independent advisors who typically target individuals with between $100,000 and $5 million in investable assets. While Schwab, as recently as last year, was reported by Cerulli Associates to control more than 70% of the market among the major custodians serving this niche, technology is eroding Schwab's dominance.

The Internet has made it easier for broker/dealers to get into the custodial business. Hence, firms like Neuberger Berman, Raymond James Financial Advisors, and Merrill Lynch have entered the fray in recent months. Furthermore, better technology has made it much easier for advisors to work with multiple custodians.

Advent Software Inc., for instance, makers of Axys, a popular portfolio accounting program, has designed a new service, Advent Custodial Data, that allows advisors to make a single, direct download of client portfolio data from dozens of custodians and B/Ds. Meanwhile, separate account management systems that are offered through the Internet, such as EnvestNet, Oberon, and AdvisorPort, free advisors to trade through a choice of brokerages. And online portfolio reporting and aggregation companies such as TechFi, StatiaFX, ByAllAcounts, and others are offering advisors technology that enables an RIA to trade as easily through Fidelity or Waterhouse as with Schwab.

To Schwab, these developments are a direct threat to its dominance of the RIA market. And the company is not standing still.

In December, Schwab sued Advent in what amounted to a power struggle between the two companies over who will control advisor back-office downloads. A California superior court judge issued a preliminary injunction in Schwab's favor on January 14. (See "Judge Rules for Schwab in Advent Case,")

Last month, Schwab announced changes to its AdvisorSource retail referral program, purging about 80 advisors who have not been converting leads into clients and bringing a select group of 400 of its 6,000 advisors into a closer partnership in a fee-splitting arrangement.

Facing the Music

The new reality Schwab faces is that a host of B/Ds, trust companies, and other custodians are eager to house advisor assets and are offering packaged products, separate accounts, technology platforms, and other services to attract those assets. To partially address that competition, Schwab is bringing Centerpiece into closer alignment with Schwab Institutional.

"For the near term, Schwab will limit new client business development--who we sell to--to investment advisors with a custody and trading relationship with Schwab," according to Nick Georgis, a senior VP in charge of sales at Schwab Institutional. "Indeed, we don't intend to sell the software to clients who do not now and do not intend to have any other business relationship with Schwab Institutional."

David Peck, a senior VP in charge of Schwab's PTI unit, says that about half of all Centerpiece sales last year were to advisors who do no business with Schwab. "We won't do that anymore," he says, though he stresses that Centerpiece users who do not have a relationship with Schwab will continue to receive software support and upgrades. "They are grandfathered," Peck says.

Still, the announcement by Schwab marks a profound change in how Schwab has treated Centerpiece. Since buying the Raleigh, North Carolina-based company, Schwab has made a point of saying that PTI was independent of Schwab. Advisors who cleared through Fidelity or Waterhouse, for instance, were as valued by PTI as those clearing through Schwab Institutional. In backing away from that stance, Schwab is paving the way to refocus its technology investment in PTI on its own advisor clients.

Schwab is building a new online back-office system for Schwab advisors that will integrate Centerpiece with advisor data to be presented on advisor Web sites. Schwab's move is part of a broader trend: All of the portfolio management companies are integrating the Internet with their packages, like Advent's recent launch of Wealthline in partnership with Microsoft. TechFi and other portfolio accounting systems are offering similar Web reports via secure servers.

These offerings extract data from portfolio management software programs such as Centerpiece, Portfolio 2001, and Axys and turn them into Web reports for presentation to retail clients. The offerings also can link to quotes on securities in a portfolio and provide news from Reuters, Dow Jones, and other wire services.

Big Changes for Centerpiece

PTI is also in the process of a major overhaul of its software. Improvements in how Centerpiece handles fixed income investments are expected this spring.

And it is moving to a Microsoft SQL database, which will make it easier to turn Centerpiece reports into Web reports and extract data for use on the Web and in other applications, such as a Monte Carlo analysis tool or an estate planning tool. The changeover to SQL is planned for September 2002, Peck says.

But the biggest change is moving Centerpiece to an online application and creating a service bureau around that application. The move to an SQL database will allow PTI to run an industrial-strength application that is scalable and thus can store data for hundreds of advisors. PTI will use that capability in September to launch a service bureau called Coworker.

Coworker will offer an advisory firm the ability to turn over its portfolio reporting chores to PTI. PTI will download an advisor's data--from multiple custodians, if necessary--reconcile it, and import the data into Centerpiece. Advisors can then view the finished reports over the Web. Schwab's Peck says that the data will be housed outside of Schwab at a secure site.

"We believe the multiple custodian relationship is where advisors are, and we support it," says Peck.

While Schwab says it is supporting the multiple custodian world, when you add it all up, its strategy in leveraging Centerpiece is clearly designed to help Schwab gain more control over the multi-custodian advisor. Taken together with its overhaul of AdvisorSource to bring the most productive advisors into a closer relationship, Schwab is shrewdly angling to retain its dominance and stem the trend of RIAs toward diversifying custodians.

Ending Centerpiece sales to advisors who do not have a relationship with Schwab Institutional is only part of that strategy. Extracting Centerpiece data into Web reports for advisor clients and creating a service bureau to handle portfolio reporting will make it harder for advisors to leave Schwab and bring Schwab into an even closer partnership with the 6,000 advisors who use its custodial services.

Editor-At-Large Andy Gluck can be reached at agluck@advisorproducts.com.

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From: Performance Technologies, Inc.

To: List Member

Sent: Tuesday, February 19, 2002 5:15 PM

Subject: PTI Announcement

Dear Valued Performance Technologies Client,

We are writing to tell you about some exciting new developments underway at Performance Technologies.

Together, Schwab Institutional and Performance Technologies have listened carefully to our clients' feedback and have incorporated your input into our vision for 2002 and beyond. Schwab Institutional has made a substantial commitment of resources to Performance Technologies, allowing us to greatly expand development work and accelerate speed to market:

We are converting our portfolio management system database to SQL Server in a project that will deliver a fast, highly scalable system upgrade as well as adding a powerful multi-user access control system, allowing a firm to provide different levels of access and control to different users within the firm.

We are in the pre-release testing phase of Centerpiece version 5.5, which adds advanced fixed income tracking and reporting capabilities along with the "Transaction Writer" feature that makes entering transactions across multiple portfolios much easier.

We are in the pilot phase of our "Coworker" project, which will provide data download, posting, reconciliation, and performance reporting services in combination with a web-based portfolio management system.

Based on our discussions with our clients we expect these enhancements to be very well received.

Performance Technologies and Schwab Institutional are forging tighter links that will affect how Performance Technologies' products will be distributed. For the near term, Performance Technologies will limit its new client business development activities to Investment Advisors with a custody and trading relationship at Schwab Institutional.

This change will NOT affect the way we service current Performance Technologies clients. Whether you are a Schwab Institutional custody and trading client or not, you can continue to purchase additional products, such as Junxure and genTrade, or add-ons to Centerpiece, such as our Enhanced Reporting Module. Centerpiece has been and will remain an "open platform" and we will continue to maintain and enhance Centerpiece data interfaces to allow you to work with the custodians of your choice.

Schwab Institutional and Performance Technologies are committed to being the market leaders in helping Independent Advisors grow, compete and succeed. We are moving forward with product development at a pace never before seen in the history of Performance Technologies, and look forward to supporting your business for years to come.

If you have any questions, please feel free to contact the Performance Technologies sales team at 800-528-9595, option 2.

Sincerely,

John A. Norwood

President Performance Technologies, Inc.

David Peck

Senior Vice President

Schwab Institutional

Performance Technologies, Inc. and Charles Schwab & Co., Inc. are subsidiaries of The Charles Schwab Corporation. Schwab Institutional is a division of Charles Schwab & Co., Inc., member SIPC/NYSE. 0002-02500

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