From the April 2003 issue of Investment Advisor • Subscribe!

The Portfolio Management Drama

Will Advent force RIAs onto the Web? Will Schwab f

Events in the business of providing portfolio management software to independent advisors are starting to look like a bad soap opera. This little corner of the advisor world is as kitschy as "General Hospital," "Dallas," or some other daytime drama. Every month, another episode unfolds in this long saga, with no end in sight.

Last month, Advent Software, which advisors usually cast in the part of the slick, greedy villain, played its part with great alacrity. As if scripted, Advent said it planned to kill the desktop version of Portfolio 2000 (P2000) in 2005. So, less than a year after purchasing Techfi Corp., the tiny competitor that thrilled its fans by driving its P2000 with breakthrough SQL database technology, will be removed from the scene.

To be fair to Advent, George Seiters, an executive VP at the publicly held San Francisco-based company, is adamant in pointing out that "we are definitely not pulling the plug" on P2000; users are actually being "migrated" to the Web. Seiters says Advent will make one last enhancement to P2000 in the third quarter of this year, and is continuing to support the product. After that, however, enhancements will be made only to the Web-based version of P2000. The work on improving P2000's contact manager module has now stopped, for instance, and all resources to develop contact management with P2000 will be diverted to the Web version of P2000, which is known as AdvisorMart.

Meanwhile, our other protagonist, the once dashing but now humbled star, Charles Schwab & Company, is playing the part of the spurned lover who now can't do anything right. Yet again, Schwab has put off releasing an SQL database version of Port- folioCenter (PC), its portfolio management software package. Schwab had first promised to revamp PC, formerly called Centerpiece, about 18 months ago. But that was before Advent bought Techfi for $25 million, at a time when Advent and Schwab were both scrambling to respond to P2000's SQL database version. Schwab originally said it would release the SQL database version in June 2002, but it was subsequently delayed until August, and then September. Late last summer, Schwab said it would release the program in early 2003. Now, the release has been postponed again, with no new release date.

To this we add a new plot line. Enter Optima Technologies Interactive Advisory Services (IAS), the dashing hero who is racing to rescue advisors from the clutches of the evil giants. Optima plans to launch a standalone PMS product. This SQL version of IAS should provide a viable alternative for RIAs. Suddenly, a credible new competitor will be on the scene.

And so it goes in the business of PMS, where every top executive is a character, every product has an epic story, and every day brings new drama. In fact, while I was writing this column, I received an e-mail from an advisor saying that he'd been told the SQL version of Centerpiece has been killed. Schwab swiftly denied the report, however.

Still, it is probably wise for RIAs to consider the possibility that the desktop version of Schwab's PortfolioCenter PMS software will follow Advent's lead and migrate advisors to the Web. It's also probably wise for Advent Axys users to consider that, at some point down the road, Advent may want to migrate all of its users to a Web-based application.

I'm not saying this will happen--and for sure, neither is Schwab or Advent. Forcing migration to the Web for 3,000 advisors using Schwab PC, or the 3,000 small RIAs using Advent's Axys, would cause a revolt. However, since your PMS application is so important to your practice, it's wise to consider the possibility--especially since Advent will do just that in 2005 with 350 P2000 licensees.

What's really going on right now is that Web-based PMS applications are beginning to supplant desktop software for independent reps affiliated with broker/dealers. Advent and other vendors say Web-based applications are the future, and they're right. But they're also motivated for their own business reasons.

Web-based applications are being adopted by B/Ds, and they support the business goals of Schwab and Advent. RIAs have so far been tepid on Web-based PMS applications, and, arguably, they make less sense for RIAs. If Advent and Schwab pursue their business interests and try to gain more adoption of Web-based PMS offerings, however, RIAs could be caught in a bit of a squeeze.

More Web, More Profits?

Software vendors like Advent are motivated to get RIAs to switch to Web-based versions because they can charge the same for their Web-based platform as they do for their desktop software and realize much lower expenses for support. Supporting a Web-based application sitting on one server in a room in San Francisco is far less expensive than supporting a piece of software loaded onto 7,000 computers with different hardware and software configurations in 3,000 different locations across the nation. The price you pay for the Web software and automated download service is likely to stay the same as it was for the desktop license, but software companies get to cut their costs and earn fatter profit margins on a Web-based version of their software.

The vendors would also like to have your data on their servers because it anchors you to them. A Web-based application could make it tougher for you to change PMS platforms. Schwab, which is experiencing greater competition in the RIA custody business, would certainly like that.

Meanwhile, B/Ds are adopting Web-based PMS applications because it makes sense for them. Advent is making a big push now with AdvisorMart Institutional. Using technology acquired in the Techfi purchase, this Web-based platform is powering Advent's recent entrance into enterprise-wide solutions for B/Ds. AdvisorMart Institutional is a great new alternative to StatementOne for B/Ds. Launched in January, AdvisorMart Institutional lets B/Ds offer reps portfolio reporting packages through a centralized system. B/Ds want to consolidate technology used by branches, ensure compliance, and store rep data on their servers.

In two or three years, the great majority of independent reps will be using Web-based applications. The great majority of RIAs probably won't, however. Consider this: An RIA version of AdvisorMart has been offered for almost three years, but has not attracted many RIAs. Most RIAs like having their customer data in their office, and they have been very slow to switch from desktop to Web-based applications that put their client data on another company's Web server.

RIAs' adoption of Web-based PMS has been far less successful. This is so despite convincing arguments by companies including Advent and Schwab that it is in the best interest of RIAs to outsource portfolio accounting chores to a Web-based platforms. "We do not want to place an increased technology burden on firms that do not have the resources to support automated workflows," says Seiters. "Advisors need to spend less time on technology and more time with their clients, and the best way to accomplish that is to take the technology burden off the advisor completely."

Your Data, Our Server

The migration of the 350 or so RIAs using the desktop version of P2000 means they will have to do their downloads into a Web-based PMS application, and Advent's server would store their data. Alternatively, these RIAs could choose to use Advent's AdvisorMart service bureau, which means Advent would handle their downloads, reconcile their data for them, and store the data on an Advent server for them.

The 350 RIAs using P2000 must decide by 2005 if they absolutely must have a desktop software application or if they are comfortable with a Web-based application. This is purely a matter of personal choice. The factors in this decision are clear-cut. Do you want to have your client data sitting on an Advent server? Will you be happier knowing that Advent can make upgrades to your software for you, and you won't have the hassle of updating the software every time a new version comes out? Are you being a control freak if you insist that your client portfolio data be stored in your office and not accessible to you only over the Internet? What choices do you have even if you want to move to a different desktop PMS application?

Which brings us back to Schwab's decision to stall the development of the SQL version of its PMS system, PortfolioCenter. Schwab completed a beta test of the new version of the product recently. It then sent the beta testers a letter that reportedly offered no real explanation as to why it was putting the project on hold.

I e-mailed Schwab spokesman Lance Berg and asked why. His reply: "The work has turned out to be more complex than originally anticipated." He added: "Our main priority is creating software that meets our standards for quality and performance and fully meets clients' needs. We won't rush the process. In fact, our clients have told us not to."

Then, the soap opera plot thickened. About the same time that Berg's e-mail arrived, I received another e-mail from an advisor, saying, "We just heard through the grapevine that Schwab is dumping its SQL project. Now it's not an option for us. We have been literally waiting for years. Got any scoop?"

I dashed off another note to Berg. He assured me this report was just a rumor. "Schwab plans to release a SQL version once we have a product that we feel is right for advisors," he said.

Still, you have to wonder what's going on. If a big company wants to create a conversion program that takes data out of its old Centerpiece database and automatically imports it into a new SQL database, you would think it should be able to do that in 18 months, even if it were a complicated task. Not moving forward with the SQL project is bound to make advisors wonder.

Keep in mind, Schwab is watching Advent migrate all of the RIAs using the desktop version of P2000 to a Web-based application. Why wouldn't Schwab tell PortfolioCenter users they are going to have to migrate to Schwab's Web-based PMS application? Apart from Advent Axys and Schwab PC, there are no rival desktop PMS applications with great credibility with RIAs anymore. Why not just skip the SQL project and migrate everyone right to the Web?

Unhappy Campers?

After all, Schwab Institutional would probably like to move all of its 6,000 RIA customers to a Web-based application for the same reason that most broker/dealers would like to see their reps aggregate all their clients' data on their servers. True, many of the RIAs that do little or no business with Schwab Institutional but use its desktop PMS system, PortfolioCenter, would be unhappy. But does Schwab care?

Schwab's not in the software business. It's in the brokerage business. It only owns a software company because that gives it leverage with RIAs. To Schwab, PMS software is a cost center, not a profit center. If doing what is in the best interest of Schwab Institutional--a major profit center for The Charles Schwab Corporation--conflicts with what is in the best interest of its software business, it's a pretty easy business decision.

Admittedly, all this is speculative. Schwab says it is going to roll out the desktop SQL version of PortfolioCenter, and we have little reason not to believe the company. But it's wise to consider the possible twists.

Personally, I think that managing your data yourself on a desktop application is not so burdensome. Also, if Advent did not have a reputation among RIAs for wanting to get paid a lot for its services, which are respected, then advisors would feel a lot more comfortable about entrusting the company with their data. And if RIAs did not feel like their practices were already too dependent on Schwab, and if they trusted Schwab more, they would feel more comfortable about entrusting Schwab with their portfolio reporting and moving to a Web-based application. It's a trust issue, not a technology issue.

That's why Optima Technologies' move to create a standalone PMS system is intriguing. In a textbook example of why capitalism is the most powerful phenomenon since compounded returns, Marietta, Georgia-based Optima is filling a void in the noncompetitive field of PMS providers. Optima makes CRM software for mid-sized and small companies and has about 100 employees.

I wrote about Interactive Advisor Services here in Investment Advisor in January. It is the integrated financial planning, customer relations management, and portfolio management software being developed by Optima with the help of a group of planners who previously used a DOS-based integrated planning package called IFS.

My review in January said IAS showed promise but was probably six months to a year away from killing its bugs and developing a credible product and service team that advisors could rely on. Development has been progressing, and I am hearing good reports from advisors involved in the project.

Now Optima says it is planning to sell its PMS and CRM modules as standalone desktop applications or as Web-based applications that are run off Optima's servers.

Running the desktop version of IAS's PMS and CRM application will not be a trivial tech task, admits Herzl Hyton, Optima's CEO. For one thing, you'll need to run your own network server with a Windows 2000 server software, and you'll need to buy license for Microsoft's SQL software.

But many RIAs are already running Windows networks, and once you bring in a consultant to set it up, the server should run itself and be stable with little more than quarterly or semi-annual tune-ups. It will cost $5,000 to license, plus $1,000 annually for up to five users. And if you add a Web server in your office, you'll be able to serve portfolio reports to clients or a remote branch from your office. Alternatively, the Web-based version of this PMS/CRM application will cost $2,400 a year for one user and $4,200 a year for two users.

Stay tuned for the next episode of the portfolio management software drama. It promises even more plot twists than The Sopranos, and will surely keep you glued to your screen.

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