From the April 2004 issue of Investment Advisor • Subscribe!

Yes, the Rich Are Different

PCR is an intriguing company with a unique approach to the wealthy

Chris Snyder is super-wealthy. He is an economist and an entrepreneur, and he hangs out with guys who have helped run Goldman, Sachs, AXA Financial, Chemical Bank, and Chase Manhattan. So when he shows up at my office and tells me he's come up with a "transformative" technology platform that will allow independent financial advisors to serve the super-wealthy, I have to listen.

Before saying another word, I must disclose a conflict of interest: I love this guy. Snyder, 61, says he is afflicted with "entrepreneur's disease." This incurable malady causes him to suffer bouts of anxiety unless he is changing the world, and his condition is also marked by episodes of uncontrollable excitement about his own ideas. Snyder is the first economist I've ever met who makes something.

I first bumped into Snyder's work around 1992 while researching a story for Worth on some newfangled mutual funds being sold as money-market substitutes. The funds were buying illiquid bank debt, and investors could redeem fund shares just once a quarter in a tender offer.

My story, colored by years of covering the burgeoning, scandal-scarred, volatile junk-bond market, warned that a downturn in the economy might result in an unpleasant outcome for investors in these illiquid bank debt funds. Of course, I was wrong. The economy blasted into the long expansion of the 1990s and the bank debt market went on to become more developed and more liquid, so the funds did just fine.

However, what was intriguing about this nascent market was that the managers of these funds priced the bank debt based on information published in a newsletter by a company called Loan Pricing Corp. Collecting a database of bank debt issues and publishing it, this tiny company with the simple name almost single-handedly created a secondary market for bank loans. LPC's unusual contribution to capitalism made a mark that lasted in my brain.

Scroll forward to December 2002. I get a call from a stranger who tells me he is building a revolutionary new database company that will provide a technology platform for independent financial advisors, and that he has emerged from retirement after selling his previous company, Loan Pricing Corp. It's Snyder, the guy who 10 years earlier helped create a market for bank loans. He had sold LPC to Reuters in 1994 for $30 million. After telling me his plans, Snyder disappears for two years. In December 2003, he calls me and suggests we meet.

Snyder shows up at my office with one of his investors, who is also a business advisor, Herbert Aspbury, vice chairman of the board of trustees at Villanova University and the former Group Head of Europe, Africa, and Middle East at Chase Manhattan Bank.

Sitting on the couch in my office, Snyder tells me his application is now fully baked. What Snyder has is a portfolio accounting system called PCR Insight. It captures transaction-level data and daily prices on all securities, so it can run reports for any time period on any asset. PCR can household accounts and do a lot of the work performed by applications like Advent Axys or Schwab Centerpiece.

But PCR is very different from other portfolio accounting and performance reporting solutions: It is driven by account aggregation as well direct downloads in batches. PCR can batch-download all of your client accounts from a custodian. But it also can download each client account one at a time using view-only data and screen-scraping techniques generally used by account aggregation companies, not by portfolio accounting systems. PCR is not a shrinkwrapped software solution; everything is custom- made. It is a service bureau built for super-wealthy people and their advisors that combines account aggregation with human intervention to download or manually input daily valuations on alternative investments as well as listed securities.

One of the most compelling reasons to pay attention to PCR is the people backing it. Joe Dionne, the former CEO of The McGraw-Hill Companies, is chairman of PCR. Its roster of backers, who have each ponied up from $50,000 to $500,000 and plan to use the system themselves to manage their own wealth, reads like a Who's Who in American financial services. But don't let that impress you too much. After speaking with a couple of these gentlemen, it's clear to me that they don't know much about account aggregation, portfolio reporting applications, service bureaus, or where PCR fits into the world of independent advisors. However, they are bankrolling the venture, are intimately familiar with the problems of the super-wealthy, and they do know the right people to open doors for PCR.

Despite all this, I'm not going to pretend to know if Chris Snyder's business will succeed. What he wants to do is complicated, and it serves an exclusive but limited number of firms. Although there are no direct competitors now, you'd think that an aggregation company, a portfolio reporting software firm, or an entrepreneurial-minded family office operation would step into this niche.

However, Snyder's venture into the intriguing world of the super-wealthy and the advisors who serve them provides a glimpse into how account aggregation could be used in the days ahead to drive portfolio accounting and performance reporting applications. Today's technology for the super-wealthy is tomorrow's tool for the mass affluent--and the next day's tool for the self-directed.

Moreover, PCR raises practice management issues about how independent advisors can best serve the rarified market of the super-wealthy and whether more advisors should try to compete against trust companies and private banks to get business from these people. Also, it's just plain fun to examine how advisors can make the world safer for people with so much money they can't keep track of it.

PCR's Unique Approach

Snyder says he and Joe Dionne were looking for a wealth management system to meet their needs when they got the idea for PCR. "Joe and I didn't set out to found a business," he says. "We set out to get this done for ourselves."

The only company that got close to offering what he and Dionne wanted was myCFO.com, which had exactly the same mission as PCR has now adopted when it surfaced in 1999 and made a splash with advisors. In October 2002, myCFO was purchased by Chicago-based Harris Private Bank, a subsidiary of Toronto's BMO Financial Group, as a proprietary wealth management system. The founder of myCFO, Netscape founder Jim Clark, sold "certain assets" of myCFO to Harris for $30 million, reportedly just one-third of the $90 million raised to start the operation. Snyder says myCFO lost focus by getting into the brokerage business and selling insurance.

After months of frustration at not being able to find a solution for managing their own wealth, Dionne and Snyder started their venture. Snyder says PCR's focus is clear: to be the authority on data in the high-wealth market.

That means creating a technology platform to collect data for the super-wealthy and their advisors, and it also means harvesting the data and publishing studies that will be shared with PCR clients and, most interestingly, sold to financial product manufacturers, luxury goods makers, and other interested in marketing to this clientele.

PCR is an odd duck. It's not a technology company, but an information company. Thinking of PCR as just a replacement for a portfolio accounting system is a mistake because PCR does not include portfolio management or trading functionality.

Advisors use portfolio accounting systems only to consolidate assets they manage or consult on. PCR provides accounting on client assets that an advisor does not manage or consult on as well as assets that you do manage. However, PCR gives you the added flexibility to restrict reports solely to assets you manage, or to break out the assets managed elsewhere.

Also, PCR's database has been structured from the start to record liabilities as well as assets, which means insurance policies, home mortgages, business loans, and other debts can also be figured into a client's balance sheet. Moreover, PCR accounts for alternative investments. This is a critical component of the service it offers advisors, and is a curious part of company's business model.

Acting as a service bureau by gathering prices daily or monthly for illiquid assets--hedge funds, private equity deals, and other alternatives--is time-consuming, labor-intensive, and messy, and getting it right is difficult. PCR aims to be expert at that.

"Advent does a good job pulling data in, but the challenge is in reconciling the data," says Snyder. "For normal things like a Schwab or Fidelity account, the error rate is pretty low--although you occasionally could miss a reorganization or a stock split. But the world of high-wealth transactions is far messier. It's not at all unusual for a wealthy person to have five or six custodians, 15 money managers, and a long list of investments in oil and gas ventures, hedge funds, and more complicated enterprises."

Decamillionaires and--this gives me a chance to coin the following terms--double-decamillionaires and triple-decamillionaires invest differently from the mass affluent, Snyder says. So they have different reporting needs from the mass affluent with net worths of $5 million or less. For instance, the average person on PCR Insight, who is worth $30 million, allocates about 30% of his wealth to listed stocks, 10% to 12% to fixed income, and a whopping 22% to alternatives.

Here's an actual alternative-investment issue that comes up for the super-wealthy. "Say you were going to invest in my friend Jerry's hospice rollup project," says Snyder. "Jerry has raised $60 million from wealthy people to buy mom-and-pop hospices. He did the same thing with graveyards a while back.

"First, he starts just with a commitment, which is recorded in PCR as a liability on the investor's balance sheet while he finds the hospices to buy," explains Snyder. "Four months later, Jerry asks each investor to send $500,000 because he just bought three hospices. When that transaction occurs, that liability on our system becomes an asset representing equity ownership in that hospice deal."

Complicating the accounting down the road, Snyder says Jerry will have the hospices revalued, and may tell investors the shares bought at $10 are now worth $25, and that the stock is splitting three for one. But working with capital calls and all the complications posed by alternative investments is not the great strength of the portfolio management systems currently used by advisory firms. PCR has been engineered from the start to do this, Snyder says.

Just the Start

Gathering the data and inputting it into PCR is done several ways at the company's Wilton, Connecticut, office. Snyder says PCR gathers data now from a total of about 400 record-keepers. Data from about 200 institutions--hedge fund managers, general partners of oil and gas ventures, commodities pools, and real estate deals--is manually gathered by mail, phone, or fax. In addition, the system is fed by electronic interfaces with about 100 custodians. Finally, another 100 or so unique assets are inputted manually representing an eclectic assemblage of items such as artwork, airplanes, and farms.

Snyder says that PCR's devotion to delivering accurate, timely information to the high-wealth individual is what makes his company unique. Snyder believes that technology companies like StatementOne, Investigo, Yodlee!, CashEdge, Schwab PTI, Advent, and ByAllAccounts are not interested in doing what PCR is doing. "We do not compete with them," he says. In fact, Snyder says he "in discussions" with two such technology companies about using their "pipes" to feed PCR with data. "All we want to do is gather the data," he says, "and we don't care if we need to use Advent or other aggregators to do some of it, as long as it helps us bring all the data together efficiently."

What's to stop the technology platforms from adapting their platforms for collecting client data to Snyder's business model? "We are the leading authority on gathering information for and about high-wealth individuals," says Snyder. "We will do it better than anyone else--it's our niche. Why doesn't Coke make Merlot wine and why doesn't GM make cars that are as good as a Mercedes?"

"Companies that make money focus on delivering a set of products and services to a community of like-minded people, and our community of like-minded people are high-wealth advisors and, through them, their clients," says Snyder.

Three Differentiators

What's unique about PCR, Snyder says, is that it has mastered several complicated challenges: accounting for complex assets, normalizing data from different systems, and reconciling it all. "In the non-high-wealth world, the assets are principally listed securities--bonds, stocks, and mutual funds," says Snyder. In the high-wealth world, they are complicated stock options, oil and gas deals, private ventures, wine collections, private partnerships, different forms of restricted stock, hedge funds, foundations, endowments, trusts with multiple beneficiaries, and assets with complex accrual and cash treatment. "Most of that capability would be wasted on a non-wealthy household," Snyder notes. "But without it, the high-wealth individual gets a snapshot of perhaps only 30% of his affairs when handled by existing solutions."

The second difference, normalization, has to do with the fact that each custodian has its own chart of accounts and transaction codes. One custodial system might call a transaction a "purchase," while another calls it a "buy." Snyder says management of these heterogeneous systems, each with their own accounting language, is called "many-to-many mapping" and presents one of the biggest challenges programmers must face.

Tania Neild, PCR's chief technology officer, was a co-founder of Envestnet PMC, a separate account management platform, and earlier in her career she was an applied scientist for the National Security Agency where she specialized in data integration and mining program development. Neild structured PCR to allow a buy by a hedge fund to be recorded in much the same way as a buy of stock or private equity, so data across different databases are normalized. Getting this to work across different currencies will be tackled this summer, Snyder says.

The third differentiator, and the most difficult task PCR faces, Snyder says, is reconciliation. "This is a dirty, expensive process," says Snyder. When there's a spinoff or when a custodian misclassifies a cash distribution as a receipt of federal funds, it may not get caught without performing the labor-intensive task of examining yesterday's list of holdings and values, examining the changes you made today, and then reconciling them. While service bureaus may do reconciliation, it is usually up to an advisory firm to check the work. I've heard mixed reviews of service bureaus that were reconciling for advisory firms, and they only handle listed securities and bonds--not the more complicated assets Snyder says PCR is handling.

PCR Pricing

In keeping with its innovative ways, PCR plans to charge advisors differently than other technology and service providers. Snyder says PCR will charge on "Wealth Complexity Units." Moreover, he suggests advisors also adopt a price model based on the complexity of the lives of their clients.

"There is little relationship between how wealthy people are and how complex their lives are," he says. "If I have $40 million in funds and you manage it all in mutual funds--and I'm not suggesting you do that--then there isn't much to do. On the other hand, if someone with $40 million owns two farms, a business, three life insurance policies, and two trusts, and has three children, an ex-wife, and two stock option plans from previous employers, that's a complex guy, and you need to get paid for that."

As an example of the smallest advisory firm that might want to use PCR, Snyder says an advisory firm with 100 clients, each with an average $2.5 million in four accounts invested across 25 stocks, bonds, or mutual funds at two custodians, would pay about $24,000 a year for PCR Insight. Snyder says that although he is not focused on advisors with such simple businesses, it could make sense if that advisor has two or three clients with $10 million or $20 million of investable assets and wanted to make the super-wealthy the main focus of her practice in the future.

A more typical engagement would involve a client with $18 million in wealth with an array of stock options, insurance, private ventures, hedge funds, and a complicated trust. That would cost an advisor $4,000 a year, although putting 25 or 50 such clients on PCR Insight would result in additional savings. Keep in mind that this gives your clients total access to view their accounts the same way you can, although only the most sophisticated clients are likely to maximize its potential.

Snyder says advisors should also consider charging based on the complexity of a client's life because it will be more rational. He says charging based on assets under management and using break points for larger clients is a "cruel trap." Taking that approach, "You wind up discounting the value of your advice to the very people who probably need it the most," he says. "Basing fees directly on the value of the advice you provide frees you from that cruel paradox."

What Do They Want?

So what do the super-wealthy want, and what do they value most from their advisors? The latest survey by Spectrem Group (see sidebar at right) seems to provide good news for independent advisors serving the super-wealthy, since it reports that advisors and financial planners have gained market share from brokers and that the wealthy are more satisfied with advisors and planners than other financial intermediaries. The Spectrem findings are great stuff, but remember that it's based on a survey.

A survey measures what people say they think, what they think they think, and how they think they behave. That can be a far cry from the truth. For instance, 52% of those surveyed by Spectrem say they'd prefer an advisor unaffiliated with a product provider, yet only 38% work with independent advisors. People say things they don't mean or act on all the time. In contrast, Snyder wants to glean the preferences of the super-wealthy based on data about how they actually behave.

For instance, PCR has about $2.3 billion of assets on its Insight platform with an average household median wealth of $23 million. The median amount of wealth spent on personal use assets--houses, aircraft, boats, cars, and collectibles--is 14%. Of those on the system, 79% own two or more homes, with the median value of the primary residence at $2.3 million and the median value of a secondary residence at $1 million; 28% have three houses and 14% have four or more houses. Excluding houses to look solely at personal use assets, those with wealth above the $23 million median level have put 33% of their personal use asset expenditures into boats, 37% into collectibles, 6% into cars, and 18% into other items.

Snyder hopes to glean such data to help advisors counsel their clients. If their spending on boats or jets is out of line, the client will know. If their asset allocation is out of whack with others, benchmarks will show that as well. But make no mistake about it, the real value of the database is to sell it to financial product manufacturers and other businesses that want to market their products to the super-wealthy.

"We are an information database company," says Snyder. "We hope to eventually have a trillion dollars of wealth on our system." Snyder pledges to keep the data encrypted and never reveal any personal information about the wealthy individuals on PCR Insight, and the contract advisors sign stipulates that.

Once PCR gets about $20 billion of assets on its platform, the plan is to gather data on what types of hedge funds actually are working, and which asset classes the super-wealthy are moving into and out of. That data is extremely valuable. In fact, it means that Snyder can afford to not make much money on collecting data in PCR Insight or scrubbing the data or servicing advisors, since his main revenue stream ultimately will be selling information from the database of super-wealthy households. "It's not a loss leader, but would not be a worthwhile enterprise standing alone that would compensate our shareholders," says Snyder. That's what's unique about this business model.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (www.advisorproducts.com), which creates client newsletters and Web sites for advisors. Advisor Products may compete or do business with companies mentioned in this column. Gluck can be reached at agluck@advisorproducts.com.

Reprints Discuss this story
This is where the comments go.