From the January 2004 issue of Investment Advisor • Subscribe!

More Help For RIAs

Investigo's intriguing port-folio management software deserves close examination

I had an epiphany this morning," says Peter Mangan, "and I realized I was wrong."

Thank heavens, I thought to myself. I like Mangan. I didn't want to have to write a story saying his fledgling RIA custody business, Shareholder Services Group (SSG), was building a proprietary technology system. Fortunately, after I read to Mangan quotes from some of the advisors I interviewed reacting negatively to his plan for using Investigo, he got it. He realized that RIAs want freedom of choice, that anything compromising their freedom risks alienating them.

This story is about Investigo, a noteworthy new entrant to the portfolio management software category. But it's only fair also to mention Mangan's epiphany.

Mangan's firm is a startup in the RIA custody business. Mangan ran Jack White & Co.'s mutual fund supermarket from 1990 till 1998 and also ran White's RIA platform from 1994 until 1998. When White was purchased by TD Waterhouse, Mangan and his team were tapped to run TD Institutional's RIA business. He did that until 2000, when he moved on to run TD's fund supermarket for two years before exiting TD.

Mangan started SSG last spring with Bob Reed, a veteran brokerage executive who was a key player in Jack White's success, and Barry Boyte, the former White and TD Institutional marketing director.

SSG signed its first contract with an advisor in August. Mangan has set a modest goal of attracting $1 billion in assets over the course of the next two years, and is not aiming to be the biggest custody platform. He believes that by using Pershing to clear advisor trades, SSG can tightly work with a small number of RIAs and add value to an RIA's business. By providing great service and leveraging his team's knowledge of the RIA business, Managan believes SSG can help his advisor clients manage and grow their businesses and thus build a small but profitable custodial services boutique for RIAs.

The deal with Investigo would stand as the first example of what Mangan wants to do with SSG: Find good practice management ideas for RIAs and help them implement and integrate them into their businesses. It's adding value to the commoditized custody and clearing business.

In explaining his partnership with Investigo, however, Mangan initially told advisors that I invited to demo Investigo that they could only buy it if they have a relationship with SSG and that the advisors would need all their assets with SSG to use Investigo. Advisors on the line reacted negatively when I asked them for their thoughts about Investigo's partnerships with SSG.

Curt Weil, an advisor in San Francisco, said, "Investigo looks like a contender but will be hobbled by being restricted to users of SSG." Dave Cowles of Boone Associates, also in San Francisco, said, "Investigo is much cheaper than what we currently pay for AdvisorMart, but is not really comparable since AdvisorMart lets you use multiple custodians." Matt McGrath, an advisor with Evensky, Brown & Katz in Coral Gables, Florida, was blunt. "Many advisors want flexibility in their custody decisions, preferring to keep custody independent of portfolio management software decisions," he said. "Linking one to the other may be seen by many advisors as a negative characteristic."

I've written before about the skepticism many advisors express about relying on Schwab Institutional's technology systems, especially after Schwab said two years ago that it would restrict new sales of its portfolio management software, Centetpiece, to Schwab clients. (Advisors say Schwab has backed away from that position, by the way.) While a lot of RIAs don't mind buying technology from their custodian or getting it for free, others feel uneasy about it. Many RIAs are leery of growing too dependent on any single custodian. If they have to rely on a custodian for technology as well as brokerage services, they feel that custodial firm could exert too much control over their business. That sentiment boiled over when Mangan made it sound like getting Investigo would be conditional on clearing through SSG.

Mangan's epiphany was that if SSG was going to use Investigo in attracting RIAs, SSG would have to acknowledge that RIAs it works with would be free to custody assets with TD Institutional, Schwab, Fidelity and other custodians in addition to SSG. Mangan's epiphany was that to successfully add value to advisors by providing them with technology, SSG must do it in a way that does not impair their independence.

SSG has an exclusive right to distribute Investigo for six months, and Investigo has agreed that it will not be sold at a price lower than what SSG RIAs receive, Mangan says. However, any notion Mangan may have had about trying to restrict the business of advisors who want Investigo has been abandoned. Market forces eventually may force all the other custodians and technology companies come to the same realization.

But the real story here is Investigo. A total of sixteen RIAs attended two Web demos of this portfolio management, accounting, and reporting software, which also is also capable of customer relations management. While some of the advisors had reservations about it, as some RIAs will about any portfolio reporting software, about half of them said Investigo was a contender, a real choice for RIAs.

"It's a pretty damn complete package," says Weil.

"It's a viable competitor to Centerpiece and Advent," says Steve Wershing, of AM&M Investment Brokers in Rochester, New York.

"Reports were good and functional and included all of the portfolio and practice management types of reports, and Investigo has good graphics capabilities," says Carol Grosvenor, an advisor in Whittier, California, and a former technology consultant to advisors.

What's most impressive is Investigo's pricing. Through SSG--and this is the lowest it will be offered for--Investigo levies a base charge of $150 a month for one custodian, and $75 a month for downloads for each additional custodian, or $1,800 a year. In addition, it's 50 cents per account per month. So if you have 100 clients with 600 accounts, it's an additional $300 a month, or $3,600 a year plus the $1,800 base fee for one custodian download, $2,700 with two downloads, and $3,600 for three downloads. So an RIA gets CRM and portfolio reporting software, along with the daily service to download account data from multiple custodians (Schwab, Fidelity, and TD interfaces are already built), for $5,400 annually for one custodian, $6,300 with two custodial downloads, or $7,200 for an RIA with three custodians. Plus, your clients have the ability to view online any reports you permit them to see, and you get "virtual vault" storage, allowing you to upload and store any personal client documents you want online.

Compare that to what Curt Weil is now paying for similar services. Weil pays an average of $1,050 a month to an outsource firm to download data on his 600 accounts daily from three custodians and SEI Investments, and another $100 a month for securities pricing. Add to that the annual licensing fees for Centerpiece of $2,550 for five licenses and it comes to $16,350 a year. That's more than twice the $8,100 cost of Investigo--without CRM, online portfolio viewing, and the virtual vault, and it includes all the staff at Weil's shop because an RIA buys a single license.

Another impressive feature is that advisors can change prices of securities manually themselves. This is the first Web-based PMS application that I know of allowing advisors to get into their database and make changes. The software has integrated nicely with LaserApp, making it easier to automatically fill in client account forms at B/Ds and custodians. It has also integrated with MoneyGuidePro, a highly rated goals-based financial planning application, and with Morningstar Principia, letting you export data from Investigo into Principia's portfolio analysis tool. The integration is real and slick. Investigo also deducts fees with flexibility to apply different fee arrangements against specified accounts.

Investigo can do all this because it's got a more ambitious business than serving the fragmented and demanding RIA market. Actually, its main target is the enterprise market--broker/dealers. The RIA market is extra. Investigo is competing with StatementOne and is the most serious competitor I've seen yet in that category. It has 26 B/D clients. A handful are enterprise deals, meaning all the B/D's reps must use Investigo, but most are deals where reps decide if they want to use Investigo and the B/D guarantees Investigo a minimum payment, according to cofounder and CEO Tom Rozman. Investigo raised less than $10 million in financing to build its platform--after the tech bust--and was able to buy the hardware and staff it needed on the cheap in the last three years.

Rozman, by the way, is refreshingly blunt and does not engage in the hype common to tech vendors. Rozman says things like, "We're not perfect, but..." when he talks about the application. Also unusual, he is a Chartered Financial Analyst, so he actually understands the calculations the software must make. Rozman started out as a Merrill Lynch broker and was moved into the Private Client Group while getting his MBA at the University of Chicago, and then moved into the fixed-income desk at Merrill Lynch.

Along the way, a junior broker, Scott Fergusson, worked for Rozman. Even after Rozman moved into fixed income and Fergusson left Merrill in the mid-1990s to become an independent rep at First Montauk, the two men stayed in touch. Fergusson, who had a programming background before becoming an advisor, designed the first version of Investigo for his own practice.

The downside of Investigo is that its CRM is not as strong as Junxure-i, ProTracker, ACT!, GoldMine, or Outlook. A new version to be launched in February should make some improvements, but there are some practical issues that could prevent real integration with an e-mail system like Microsoft Exchange, or GoldMine.

Another negative is that although Investigo handles fixed-income securities data, the data downloads on prices, call dates, and accrued income will only be as good as what your custodian provides. Some custodians do a better job at this than others. You may wind up with some manual entry.

The other issue is that Investigo could be purchased, the same way that TechFi was bought by Advent. The 50 or 60 investors probably would like to make a profit on the deal.

Still, a significant new player is here for advisors, and the portfolio software field is getting bigger.

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