From the August 2005 issue of Investment Advisor • Subscribe!

THE GLUCK REPORT, Part I: A Cautionary Tech Tale

Integrated Decision Systems has great portfolio management software. It's also a company in trouble

Integrated Decision Systems, a portfolio management and accounting software company that set a new standard for RIAs and was chosen by Fidelity Investments as the centerpiece of its new integrated advisor platform, has unraveled and its survival is in question. According to former IDS employees, two venture capital firms that over the past two years had invested $14 million in IDS began squabbling over the future direction of the company in recent months and in June refused to provide additional funding after the company's VC-installed management burned through the company's cash.

On Sunday, June 19, after months of fighting by the financiers, sources say IDS CEO Don Totter asked managers to phone the company's 80 employees in Los Angeles and New York to tell them not to report to work the next morning. The company could not meet its next payroll, the employees were told, and only a skeleton crew of about 10 people would keep operations running.

IDS, a 24-year old firm with $4 trillion of assets on its portfolio accounting and management platform and a blue-chip client list, had been brought to near-collapse in sudden fashion. Within a few days, sources say, the VCs agreed to fund the company with enough cash to bring back an additional 20 to 25 employees who could keep the business running for two or three months, buying enough time so that its management could explore finding a buyer.

With most of the company's employees desperately scrambling to find new jobs, however, it didn't take long for word of IDS's implosion to travel through the small network of technology firms specializing in portfolio reporting, and the news quickly spread as well to customers and prospective buyers of its software. As we went to press, no deal to buy the company had been announced, and CEO Totter did not return several calls asking for comment.

For independent advisors, the unraveling of IDS is a bigger story than the bickering of two VCs. It is a cautionary story of how RIAs and registered reps are constantly exposed to the changing fortunes of small technology companies that could quickly be taken over or go bust. It's a story about how portfolio management software (PMS) vendors that independent advisors must entrust with the lifeblood of their business--their client data--could come to be controlled by companies that they might otherwise never choose to do business with. It's a story about how even industry giants like Fidelity can make big bets on companies that blow up, leaving RIAs on a custodial platform in limbo. Finally, it's a story about how not to run a small, fast-growing business.

Innovation and Dedication

The IDS story is particularly poignant for me. Having covered portfolio management software in this magazine since 1996, I wrote a series of reviews that appeared from December 2004 through March 2005 about nine PMS packages. After spending about 80 hours exploring details like which packages offer specified tax lot accounting and the most brokerage interfaces, I concluded that the very best Web-based PMS program was IDS. "IDS seems to have more features and capabilities than Schwab PortfolioCenter or Advent Axys, which until now have been the leading candidates for demanding RIAs," I wrote in my March 2005 review.

Based on interviews with numerous current and former IDS employees, all of whom would speak only on the condition of anonymity, I learned that the company was coming undone even as I wrote my glowing review of its Web-based application this past February. They helped me piece together a history of IDS that is worth understanding.

IDS possessed a strong entrepreneurial culture led by a core group of loyal employees dedicated to the company's success. The culture took root under the guidance of Dr. Jerald Jackrel and his wife, Madelyn, who led the management team for two decades prior to the VCs moving in.

When IDS began operations in 1981, it was programmed in Fortran, an ancient programming language. It was backed by a successful insurance sales operation, Kramer-Wilson Company, as an investment. By the mid-'80s, the company had picked up some money manager clients. In 1985, Lawrence Kramer, one of the investors, brought in his stepdaughter, Madelyn Jackrel, and her husband Jerald Jackrel, a physician, to run the company. "They were not professional managers," said a former employee. "She had been a housewife and he had been a physician, but they put their lives into the company and treated all the employees like they were part of their family."

Over the next decade, the Jackrels hired a young staff that worked long hours to help grow the business, and they successfully moved their portfolio accounting and performance reporting application into the big leagues. In the the mid-80s, the Jackrels rewrote the software on a relational database, made it a multiuse product, and moved the software to a more stable Unix operating system. According to two former employees, those enhancements helped IDS land a deal with Morgan Stanley in 1990. With Morgan Stanley's fees funding development of a multi-currency product, Global Investment Manager (GIM), during the 1990s, IDS was transformed into a profitable business with 110 employees.

Rocky Times, and the VC Solution

In 1999, Fidelity Investments signed on to have IDS create performance reports for its retail Portfolio Advisory Services mutual fund wrap product. Fidelity was not interested in IDS's well-developed processing and accounting capabilities, just its performance reporting engine. Customizing GIM's code to make a standalone application for performance reporting that could be scaled to millions of accounts would eventually spawn a new product, Caliper. By March 2004 Caliper's customers included AG Edwards, UBS Financial Services, and Wachovia Securities, according to two former employees. Caliper now supports more than 16 million retail accounts. Brokers at these firms for the first time have been able to get performance numbers daily and run them against benchmarks. These firms had previously provided their brokers only positions and balances.

Despite its successes, the road was rocky for IDS. In 2000, the company was shaken by the near failure of Informix, the maker of the relational database on which its products were built. With Informix's future in doubt, growth slowed. Business stayed slow even after Informix was purchased by IBM. In the months after the September 11, 2001 terrorist attack, growth screeched to a halt. For the first time since the Jackrels began running the company 15 years earlier, they resorted to laying off some workers, according to two employees. By the end of 2002, the company was in financial straits, say company insiders. That's when the Jackrels received a call from a local venture capital firm, Los Angeles-based Shelter Capital Partners.

The partner at Shelter who contacted the Jackrels was Bahram Nour-Omid, a bright and successful technologist. He had been the founding chief technology officer at Scopus Technology, which went public during the Internet stock boom and was acquired by Siebel Systems. According to an individual familiar with IDS's VC partners, since Nour-Omid did not have direct experience in financial services, he suggested bringing in another VC investor, Robert Barrett, a partner at San Francisco-based FT Ventures, which had invested in a number of financial services technology companies, including Financial Engines, Actimize, and E-Loan.

The Jackrels, seeking a way to prop up their business and find a way to take the company to a new level, struck a deal with the two VCs. "The Jackrels wanted to partner with someone who had management experience and funding to take the company to an online product," says one former employee, "and they wanted a way to transition out of day-to-day management of the business." On April 29, 2003, IDS announced that it had received $8.5 million in funding from Shelter Capital and FT Ventures. Sources with knowledge of the deal say the VC firms eventually invested another $5.5 million in the company and wound up controlling 80% of its stock. In April 2004, the Jackrels retired from day-to-day management of IDS and became consultants to the company.

Soon after the VCs gained control of the company, they brought in their own CEO, naming Totter to the post in November 2003. Totter had a great track record, with 24 years of experience in the financial services industry. He led sales for the brokerage division of ADP and spearheaded ADP's growth in the outsourcing of securities processing for the equity and fixed-income markets globally. As his bio on IDS's Web site says, Totter had "a history of growing businesses at world-class companies." However, he had no experience in running a small business.

IDS's VC backers had hired a new CFO, IDS's first, and Totter brought in VPs of sales, engineering, and for IDS's new Web-based application. He also hired as VP of marketing Ron LoVetri, who had run marketing technology at Schwab Institutional in the late 1990s. The new team was high-powered and represented a new breed of employee at IDS, which until then had been run by a small group of managers that had been with the company for over a decade and were loyal to the Jackrels' vision since the 1980s.

The plan for the company was simple: Push IDS's Web-based PMS software business. Until then, IDS had been licensing its software. Big companies would buy it and put it on their own network servers and maintain it themselves. IDS would get license revenues. The Web-based ASP business on which the Jackrels had been pushing development for several years could be much more lucrative because it would run on IDS's servers and allow IDS to control the fate of its clients.

Culture Clash

Moreover, instead of just the 40 or 50 institutional clients IDS had been serving, the ASP product could be sold to thousands of brokers and RIAs across the country and not remain tied to a corporate network. The idea for Totter was to take IDS from being a $10 million company to $50 million or even $100 million in sales, according to former employees.

One of the key markets for the ASP business was RIAs. By the time Totter came on board with IDS, the Jackrels were near closing a deal with Fidelity's RIA division. Within months of Totter joining IDS, Fidelity's RIA division signed a contract with IDS to distribute the ASP application that it was programming, a story that broke in this column in June 2004.

For Fidelity, the move to select IDS seemed ingenious. Its chief rival, Schwab Institutional, owns a PMS software company, Schwab Performance Technologies, which makes PortfolioCenter. The software placed Schwab right in the middle of an advisor's business, but it also opened Schwab up to criticism by RIAs who feared Schwab would use its technology influence to control their businesses.

Fidelity would not make Schwab's mistake. It would cleverly aim to get the best of both worlds by partnering closely with IDS while promoting the company as an independent PMS vendor. During the second half of 2004, IDS began a beta test with Fidelity, and by all appearances the company was paving the way to enter the RIA market and was readying release of its ASP application, former employees say. But inside IDS, a mess was developing.

A culture clash between longtime IDS employees and the new, VC-backed management team was damaging morale. "They were spending money like there was no end to it," said one former longtime employee. "Here was a small company that had watched every penny, but suddenly we had these new people who were traveling all over the place and had big expense accounts, salaries, and bonuses. Since they all came from big corporations, none of them had any idea about cost cutting and watching expenses." In addition, Totter, a New Yorker, was shifting power to the East Coast, where he had his office. "He said the power needed to be in New York," said the former employee. Veteran L.A. employees said they resented the shift.

While morale at IDS slipped, so did sales and attention to its core business. According to an IDS source, Wells Fargo ran a pilot of IDS's license application in the fall of 2004 and was expected to buy the software. In November 2004, the sale fell through after Totter refused to customize the GIM product for Wells. "We were told that Don did not want to do any more programming for the license product, and new programming resources would only be thrown at the new ASP product," an employee says. "After we lost that deal, things started to get bad with the board."

According to two former employees, Shelter Capital's Nour-Omid wanted Totter to pursue a merger offer from ebusinessware, a New York company with a global consulting business and strong programming capabilities in India. While such a deal would mean that additional programming for the ASP application could be done for less money by sending it offshore, employees speculate that it also meant Totter could lose his job as CEO. Regardless, Totter and Bob Barrett of FT Ventures did not want to pursue the merger.

The VCs' shareholder agreement allowed them to block each other on a sale of the company, and their standoff continued as employee morale suffered. At the same time, the focus on the ASP business, which brought in no revenue, led to neglecting the license business, which brought in all its revenue. The stalemate continued until June 19 of this year, Father's Day, when Totter informed managers to phone employees and tell them not to report to work.

Barrett could not be reached, despite several messages left on his cell phone. Nour-Omid confirmed that the company received $14 million in funding and said that it had received additional funding in recent weeks to continue operations. He said he would urge Totter to speak with me about the current condition of the company, but Totter has not done so.

According to a source familiar with the attempts, several companies have expressed an interest in buying IDS, including SunGard, Envestnet, and EISI, makers of Naviplan financial planning software. In addition, the source says Checkfree APL and Advent Software are also "sniffing around." With funding secured to get IDS through the next couple of months while Totter pursues the sale, it does seem likely a buyer will emerge. That's because IDS has an existing healthy revenue stream on its license business and an ASP product with great capabilities that it was set to launch for general release on June 20.

For RIAs, the IDS tale is a disquieting reminder that the small technology companies that specialize in creating applications geared to their needs are highly volatile. Those companies are also subject to changes in ownership and focus that might wreak havoc with their business plans. Even Fidelity is not immune to betting on a company that takes an unexpected turn.

For Fidelity, the stakes are high. The company has already integrated IDS into its back-office systems and was making IDS's ASP the central application of an integrated advisor platform that would include financial planning and customer relationship management capabilities. Yet in a prepared statement, Fidelity appears to have backed away from its previously strong commitment to IDS. "It's not appropriate for us to comment on changes that may be taking place at IDS or any other company," said Fidelity spokesman Adam Banker. "It is our strategy to provide advisors with independence, choice, and open architecture. We enable advisors to choose solutions from a variety of vendors."

Banker pointed out that advisors working with Fidelity can choose from more than 15 portfolio management solutions providers. He added that only about 14 of the more than 2,700 independent advisory firms that work with Fidelity have participated in its beta program of IDS's ASP product, and "we work closely with all our third-party providers to help ensure the continued smooth operation of our advisors' businesses."

Those who care about IDS are holding their breath. "All of us have a wait-and-see attitude," says a former employee. "We're waiting to see who, if anyone, buys the company and whether the vision returns."

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. He can be reached at agluck@advisorproducts.com.

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