From the February 2008 issue of Wealth Manager Web • Subscribe!

Uneasy Partners

Jeffrey Palmer remembers what it was like back in the 1990s when his firm employed 30 different custodians nationwide, and relied on four staff members burning the midnight oil every time client reports were due. "Reconciliation used to mean getting a statement from each custodian, comparing it to our own records, going through it line by line and putting down check marks. Imagine doing this on 500 accounts at one time," says Palmer, senior managing director of Gries Financial LLC in Cleveland." We had four women in the trading operations department, and when it came time for quarterly reports, they'd work through the night with signs on the door saying, 'Quiet! Reconciliation in progress.'"

Those days are gone.

Palmer streamlined Gries' custodial ties by moving 95 percent of its accounts to Fidelity's platform, for starters. He has also become one of a group of nearly 20 advisors working to help Fidelity craft a new wealth management platform for independent advisors--one that will turn portfolio management, customer relations management, and financial planning software into components of a unified system triggered by a simple, single sign-on.

While there are numerous routes for advisors to take when it comes to choosing the right technology, Fidelity--which plans to invest some $50 million in the program when all is said and done--has tapped into a critical wealth manager issue: Namely, getting its systems to interact more cleanly with one another. When Fidelity interviewed CEOs and other "technology decision-makers" at 30 RIA firms to better understand their needs back in mid-2007, RIAs confirmed that they were still frustrated with the amount of time they needed to spend on repetitive, manual tasks like re-keying client data.

Best-of-Breed Buddies

Thankfully, says Palmer, Fidelity has done away with the concept of building its new system from scratch. Aided by its advisor-led technology steering committee, the firm designed its Wealth Central platform to provide access to several existing software applications, including Oracle's Siebel CRM On Demand, financial planning via EISI NaviPlan, and portfolio management with "comprehensive client views." Also included is Advent's Portfolio Exchange product and Back Office outsourcing service.

This was not the original plan, Palmer confides: "When we first started meeting, the idea was a fully integrated platform including client contact, asset allocation and rebalancing tied to a financial planning package integrated so all the programs are aware of each other and you're not re-keying all the information," he explains. However, "We were all very skeptical of Fidelity's ability to deliver a product of this magnitude and effectively compete with [a vendor such as] Advent." Gries has been pleased with how Advent's portfolio management system has performed over the last 18 years, and Palmer didn't relish the idea of starting all over with something "new and unproven."

"Now, instead of reinventing the wheel, they're dealing with best-in-breed companies," he says, breathing a sigh of relief. Fidelity will be piloting its new Web-based system through the early part of 2008, with plans to go live by yearend. While continuing to build capabilities into the platform, its current Advisor CHANNEL brokerage platform will remain desktop-oriented, says Edward O'Brien, senior vice president of technology product management at Fidelity's Boston-based Institutional Wealth Services Group. Going forward, "Advisors won't have to worry about installing software or maintaining data in their offices as "all the products we've selected are Web-based, hosted solutions," he says, adding that much of what "we're planning to do on the Wealth Central Platform reflects what we've heard from advisors."

Market Trends

Looking at the big picture, Jim Starcev, managing principal at Etelligent Consulting in Overland Park, Kan., identifies several trends which continue to influence advisor technology and relationships between wealth managers and vendors. These include:

o Mergers & Acquisitions. In addition to the 2006 merger of the industry's two leading financial planning software developers--which occurred when Emerging Information Systems Inc., developer of NaviPlan financial planning software, took over Financial Profiles, Inc.,--Starcev cites TD Ameritrade's 2006 acquisition of iRebal, a software rebalancing tool for wealth managers that evolved out of the work of Gobind Daryanani' (See, "Weights and Bands," Wealth Manager, June 2007). And now there is the pending agreement between Pittsburgh's PNC Financial Services Group and Albridge Solutions of Lawrenceville, N.J., which delivers wealth management services including aggregation and performance reporting and analysis.

Fueling this M&A activity is growth in outsourcing services, says Starcev, noting that at the tail-end of 2007, Fidelity announced a partnership to offer Advent Back Office, and Schwab announced it was acquiring Starcev's own firm, Etelligent, to provide portfolio-management and accounting software consulting and products to advisors.

o Account Aggregation. This was a big trend in the 1990s that soon lost its luster, but now advisors are awakening to it once again. They are seeking access to all their clients' investment information, including 401(k) and other qualified plan assets custodied elsewhere, as well as investments made with competing advisors. Wealth manager Todd Rustman, CFA, CFP, and president of GR Capital Asset Management in Newport Beach, Calif., believes that aggregation has come to the forefront again. "The delta of change is happening so much faster these days. We need to--and our clients demand to-- know where they are with things so much quicker in order to make more informed decisions." The bottom line, he says, is that advisors can't afford to take a limited view that does not include each and every one of their clients' existing sources of wealth and investment wherewithal.

Rustman spends $300 each month for eMoney Advisor, which he describes as an account aggregation tool with a set of financial planning tools such as calculators, excel spreadsheets and Monte Carlo simulations. On top of that, he plans to hire a new staffer soon, one who will be dedicated entirely to handling client passwords and other aggregation-related tasks. A clear downside to the aggregation trend, he says, is that "most clients in this realm are so busy, they don't want to take the time to give you a user name and password." Rustman says that "as we are asking clients to help us by taking time out of their day to link their relationships to the eMoney aggregation tool, a 'pleasantly persistent' employee should prove to be most helpful."

"There are a number of reasons advisors might want to consider adding data aggregation services to their practice," according to Charles Schwab & Co's. 31-page white paper entitled, "Technology Best Practices: Making the Most of Your Technology Investment," published in 2007. "First, the client's relationship with a firm will be strengthened if the advisor is able to speak to a client's entire financial picture. Second, the advisor can become more proactive in managing the relationship if they are able to see all the clients' holdings and potentially charge a fee for advising on those assets. Finally, the technology has improved to a point where data can be gathered from a wide variety of sources, including banks, credit card companies, insurance agencies and 401(k) providers, so that the financial picture is increasingly holistic." For advisors offering wealth management services to a more affluent client base with more complex holdings, providing data aggregation services may make good sense, the report adds.

o Continued interest in rebalancing software. Despite hefty fees, this continues to be a growth market, says Starcev, pointing to vendors such as iRebal and Upstream Technologies and products like ASI's Portfolio Rebalancing Solution. The latest version of the ASI product, released last spring, features locking enhancements that allow advisors to exclude specific securities from rebalancing at the individual account level. Also included are "tolerance bands" that enable advisors to identify when accounts drift away from the securities-based model, isolating the rebalancing process to just those securities that have drifted beyond advisor-set bands. The drawbacks here are that the systems in question require a significant time commitment when they're first set up--in some cases as long as six to 12 months--and they can cost as much as $50,000 annually for iRebal, says Starcev. And yet, thanks to these systems, functions which might have taken a couple of days in the past--shifting an allocation across all clients, changing a single investment across the board, or raising cash by selling across a clients holdings--are now down to hours or even minutes.

Meanwhile the most critical trend of all--since it involves all the aforementioned vendors and processes--is that advisors want all of their software to work together, and to eliminate the need to "redundantly enter data." (See "Hi-Yo Silver," page 42.)

Custodians: Don't Tread On Me

To date, advisors have tended to purchase their technology independent of their custodians--a trend that was borne out in a fall 2007 study by Boston-based consultants Cerulli Associates. (See "RIAs: Sources of Technology," page 20) In "RIAs: Evaluating Opportunities in a Maturing Marketplace," Cerulli found that the RIA industry continues to grow rapidly, with assets increased 52 percent from approximately $950 billion amassed by 11,745 firms in 2005 to $1.4 trillion held by 14,451 firms as of 2007. But despite a level of growth that often calls for the scale and efficiencies major custody firms can deliver, custodians need to tread lightly in approaching advisors, Cerulli warns. Says Bing Waldert, associate director and author of the report: "They need to do things in a way that doesn't threaten the independence of the advisor."

Still, opportunities exist because advisors don't seem particularly happy with what they've purchased. Indeed, fewer than a third of Cerulli's respondents said they were "highly satisfied" with the systems they've purchased. (See "Advisor Satisfaction with Software Programs," page 22).

Perhaps this is why the landscape is beginning to shift, and why advisors may be willing to take a fresh look at the major custodial players. It is true, Waldert observes, that RIAs have tended to be "very independent," and as such they have been hesitant to tie their business to any of the large custodial complexes. Let's face it, he says, "these companies have retail arms," and RIAs hardly want custodians encroaching on clients. On the other hand, advisors disappointed with their existing technology systems and wishing to see them more integrated with custodians' platforms may soon begin to consider powerhouse alliances like the one Palmer is trying to forge with Fidelity. Beyond the sheer scale of these firms and their considerable capabilities, "the growing level of trust has to do with everybody becoming more comfortable with technology," says Waldert, who advises custodians and broker/dealers to exercise "a gentle hand in their RIA relationships" to prevent negotiations from breaking down once they've gotten started.

This supports Palmer's belief that the new platform Fidelity is building won't replace relationships advisors have had in place for years or even decades, but will nevertheless link critical systems to one another seamlessly so that client contacts are stored not only by client name but by portfolio data, for instance. What that means is, "If I want to bring up your record with your address and summer home location and what we talked about last time and who your attorney is, as well as your accountants' record to see who else in my data base is using him or her, I can drill that deeply from the same single sign-on."

New Workflow Detectives: Paperless CRM Systems

Interestingly enough, one of the most vital technology concerns for many advisors is the one that sounds the least sexy: Developing a (virtually) paperless record system. "We're seeing more and more firms embrace that [concept]--getting rid of boxes and folders and getting that stored electronically," says Dan Skiles, technology vice president at Schwab Institutional. This is not just about pure storage, he explains. "If you just want to store your documents, and you're not worried about who has access to the information, you can go out and buy a scanner and a software program for $2,000," he says.

On the other hand, if you are interested in workflow and tracking the people who open the account and transfer assets to the custodian, through to the trader dealing with investment decisions, paperless is the way to go says Skiles, adding that "increasingly, we see advisors wanting to have more confidence in the process than hunting down a folder that might be on my trader's desk." This past year alone," he adds, "we've done over a dozen roundtable events where we get a group of advisors together to talk about technology and the paperless office comes up at every one of them."

Christopher J. Cordaro, CFP, CFA, a partner at RegentAtlantic Capital in Chatham, N.J., and winner of the 2006 Best-in-Tech award bestowed annually by Schwab, says that his firm currently uses its Microsoft CRM system in a similar way--"not just to keep track of client data, but to keep track of workflow across our client service teams, productivity of each team and, when integrated with QuickBooks (our accounting package), to track individual client profitability."

"CRM is usually thought of as a way to obtain a client's name, address and phone number as well as all of the emails and contacts we've had with them," says Cordaro, who adds that "Most CRMs do a good job with that," but three years ago RegentAtlantic implemented a Microsoft CRM system that is also good at tracking workflow. "When a client opens an IRA, for instance, we log that case into the system, and new account case steps are created so that whether someone is sending an application out to the client or following up on getting information to our custodians or depositing or withdrawing money, we can see how much each of our team has in its queue of different things to do," Cordero says.

"We are also able to download supplemental 401(k) data for highly compensated individuals," Cordaro notes, which enables his firm to provide advice on how to allocate among different non-qualified and deferred compensation plans and ensure clients are deferring the maximum on their 401(k)--all without having to make manual entries into their system. "One thing ByAllAccounts lets us do that many other aggregation firms don't do is aggregate assets held by competing wirehouses or advisors," he adds, referring to the popular data aggregation program.

Rebalancing Comes of Age

Brian Stimpfl, managing director for business solutions at TD Ameritrade Institutional, says that his firm purchased iRebal late last year with the recognition that rebalancing was another "pain point" for advisors. "The process of rebalancing in some cases can take weeks," says Stimpfl, thus, "We've put a lot of calories into solving this problem."

Ameritrade offers two routes to rebalancing. The simpler alternative, its ASI rebalancing tool, was recently enhanced with such features as tolerance bands, enhanced locking functionality and mutual fund trades in dollars versus shares. For high-end advisors with large client bases or complex rebalancing processes, meanwhile, iRebal has simplified the process "outrageously," says Stimpfl--"Cutting down a multi-week process to only two to three days--and with fewer people."

As of late last year, iRebal had about 33 advisory firms using its software, with roughly $30 billion of assets under management. This "multi-custodial solution requires $300 million under management as a minimum right now," Stimpfl said recently. The setup does take time and money, he concedes.

The software (which is not Web-based) is installed at the client level,) and it takes about three months to get custom rules down and working properly. The cost to license software for advisors who don't use Ameritrade as a custodian is $50,000 a year. On the other hand, those with sufficient assets custodied at Ameritrade are able to have their fee waived, Stimpfl says.

Skimping Is a Mistake

Advisors interviewed for this article said that whatever the investing climate, they wouldn't think of trying to save money by curtailing technology investment. "If there's going to be more compression on fees going forward, I think it's likely there will be more work per client, particularly as they get closer to retirement," says Greg Gardner, president of the Gardner Group, an independent advisory firm in Dallas. Clearly, says Gardner, "Our time is coming under pressure."

Five of his clients were planning to retire within two weeks of his recent conversation with Wealth Manager, and "We just finished up 15 required minimum distributions," he says, '--not one or two like five years ago. More complexity is showing up in our workflow," adds Gardner, whose firm has implemented Junxure's CRM system as well as E-Money's aggregation program and Schwab's Portfolio Center portfolio management system since he and his partners left LPL at the end of 2004. Gardner echoed other advisors who complain about the lack of integration between the various systems. He observes that whereas "most of our software solutions are members of Your Silver Bullet," these providers "all need to take another step forward." There is still way too much data input required, Gardner says. All the same, given the challenges outlined above, he firmly believes that "business technology is the only way to improve the margins."

Kinks to Work Out

Palmer is similarly convinced, observing that at a time when some experts are warning of recession, the resulting demand for sound advice would be an opportunity, not a calamity. At the same time, Palmer is hardly insensitive to the costs he is paying for advisor technology, and he anticipates that when all is said and done, Fidelity's newest system "won't cost more than we're spending now."

Beyond cost concerns, there are a few other kinks that still need ironing out when it comes to integrating Fidelity's platform with other software systems that speak their own language. For instance, Palmer notes, "What if the financial planning system knows e-Bay as a large-cap growth stock, while the portfolio management system classifies it as a domestic equity and a rebalancing tool considers it 'Misc. Retail or Technology?'"

Clearly, Fidelity has to make all of the participating best-of-breed vendors 'play nice,'" says Palmer who adds that he is very optimistic about the way the system is being developed. He cites the incorporation of usability studies for the interface design and advisor input gleaned from his group, which has been meeting in Boston once every quarter since 2006. Nevertheless, he admits he is concerned about all of the data being delivered over the Internet. "One needs great confidence in the provider from a security and reliability perspective," to make that work, he says. And finally, "One of the issues has to be: Who owns the data?" That's the big question. "If we part company with Fidelity, can we pull all our data off and just walk away?"

Janet Aschkenasy wrote about special needs clients in January.

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