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Not-So-Private Affairs

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By now, most state and federally regulated RIAs have complied with the Gramm-Leach-Bliley Act and sent privacy notices to clients. But even as the notices are being mailed in time for the July 1 deadline to establish a privacy policy, a backlash by consumers is beginning. And who can blame them?

“As a privacy statute, Gramm-Leach-Bliley is narrow and poorly conceived for financial services,” says Joel Reidenberg, a professor of information privacy and Internet law at the Fordham University School of Law in New York. “The statute, through regulations like S-P promulgated by the SEC, imposes cumbersome notice obligations on financial institutions with no real privacy protection.”

G-L-B was passed in November 1999, with its main goal being the dismantling of the Glass-Steagall Act. But G-L-B also included a provision protecting consumers from privacy violations.

This part of G-L-B required seven federal agencies, including the SEC, to promulgate rules enforcing the statute. The SEC put forth Regulation S-P and it became effective in November 2000, but RIAs, brokerages, and other financial institutions have until July 1 to comply with the law.

Most households have likely received by now multiple notices from financial institutions disclosing their privacy policies. Although the notices may protect consumers from totally sleazy practices, the rules leave some gaping loopholes. It makes you wonder who is really being protected.

I know that what I’m about to say isn’t politically correct. After all, why should I be decrying a lack of regulation of the financial industry? In addition, I’ve developed great respect for the people at the SEC over the 15 years that I’ve covered the agency’s actions. In fact, after I wrote a first draft of this story, I slept on it and thought I might soften it because I was being too critical of the law and the SEC rules implementing it. But when I woke up and checked my e-mail, I found this note from Peter Lucier, an advisor in Temecula, California.


This whole privacy thing seems to be much ado about nothing for regular advisors. Many of us small fries don’t own banks, loan companies, mortgage companies, partner with mutual funds, or sell insurance. As a result, we tend to not share our clients’ data with anyone. I am not trying to squeeze every penny of profit from each client by cross-selling everything in the world to them, so sharing with affiliates and third parties isn’t an issue. But we had to study this, pay a compliance consultant to help us and maintain the notifications, do mailings, etc.

Very expensive way to make the abusers tow the line. By the way, have you seen these new disclosures? The opt-out stuff is so small and hard to find most people aren’t going to opt out and nothing will have been gained. The big guys won again and we will all pay the price for that.

Lucier nailed it. Wirehouses and financial conglomerates that want to share information about clients among affiliates are the ones who will benefit from this law. Most RIAs and independent reps don’t have affiliated subsidiaries. In other words, independent financial advisors have far less to gain from this lax consumer protection measure than large institutions.

“RIAs will be tarnished by the things that the large investment firms will do,” says Reidenberg. “They don’t have formal affiliations. The large conglomerates will be sharing every bit of information they can with their affiliates.”

“The overarching import of this law is to provide a benefit to financial companies,” says Daniel Solove, a privacy law expert and professor of law at Seton Hall University in Newark, New Jersey. “The law grants freedom to financial companies to do what they want and they need only be very vague in disclosing categories of information they share. This law makes it difficult to be informed fully about what’s happening with your personal information because the notices are very, very vague and the vast majority of consumers will take these notices and throw them out,” says Solove.

Reidenberg says the disclosures will allow financial conglomerates to abuse consumer data. “The typical disclosure simply says that a company shares information with affiliates, but you don’t know who the affiliates are,” he says. “Even if you’re a lawyer and read the notices carefully, there’s almost no way for you to truly know who the entities are that receive the information and what specific uses the entities will make of the information.”

To some degree, independent financial advisors will benefit from the generic disclosures G-L-B imposes. It keeps it easy for you to hire third party companies to help you service clients and market to them. But in addition to being financial advisors, independent advisors are also consumers. And, with all the talk in the profession about protecting the public, it’s only right to recognize when consumers are being abused. So at the risk of sounding like Dennis Miller, I’ll continue my rant about what’s wrong with G-L-B by focusing on where disclosures to clients of independent RIAs might be inadequate.

For independent RIAs, complying with the privacy rule has been pretty easy. The Financial Planning Association provided a tool kit on its Web site ( offering sample disclosures you can make to clients; the Investment Counsel Association of America ( and the SEC Web site ( also have sample paragraphs an advisor could use.

To summarize the rules very briefly, the privacy notice needs to be made annually. RIAs also need a policy for safeguarding client data. You need to present the policy and disclosures about what you do with client data to clients annually, generally by mail so receipt can be confirmed. In putting RIAs on the hook in writing, the disclosures do establish a minimum standard.

The rules say you must disclose to clients annually your policy on how you treat their nonpublic information. Nonpublic information isn’t just your client account data, by the way. It would include even a simple list of your client account names and addresses.

Practically speaking, independent RIAs are extremely unlikely to share their client list because it is such precious information. But this disclosure requirement does provide protection to clients in the unlikely event that an independent advisor might be inclined to provide client data to a third party for marketing or some other purpose. In addition to the disclosure, an RIA would also have to offer clients the right to “opt out” and not have their nonpublic information released by the RIA. Again, this makes sense and provides some privacy.

But the SEC rules create significant exceptions to making these disclosures. For instance, if you hire a mail house to send clients portfolio reports or newsletters, then you can simply make a vague disclosure that you provide your clients’ names and addresses to certain third party companies.

Moreover, because a portfolio report is part of servicing the client account, you would not be required to offer an opt-out. Similarly, if you use a service bureau to prepare your client reports or if you upload your client reports to your Web site using a third-party vendor, a generic disclosure about this is all that’s needed to satisfy your obligation.

You won’t have to provide an opt-out because an RIA is permitted to disclose data to a third party vendor and not offer an opt-out if the vendor is performing a service that helps RIAs process and service transactions and products.

To qualify for this exception on the release of nonpublic data about a client, the RIA must disclose that the information is released to third parties in its privacy policy and the RIA must also enter into a contract with the vendor prohibiting the vendor from using the data for any purpose other than the one for which the vendor is hired. RIAs have until June 30 to insert clauses in their contracts prohibiting misuse of the data by their third-party vendors, and contracts already in effect are grandfathered through June 30, 2002.

What concerns me is that your clients’ portfolio data–how much they are worth, where their assets are located–is extremely sensitive. Indeed, some clients may be concerned about having their personal data on the Internet or being handled by a unregulated third-party vendor. Yet RIAs can hand off portfolio data with little more than a generic disclosure and not offer an opt-out.

Under the current rules, you can put your client portfolio reports online using a third party vendor, hand off your client list to a newsletter publisher, or use a service bureau to perform portfolio reporting. And it’s likely that your clients won’t ever know exactly what you’re doing with their data. Furthermore, in the case of vendors helping service products and transactions, you don’t have to give clients the right to opt out of the information sharing.

Sharing client data with a regulated entity such as a brokerage or insurance company to service an account is one thing. But sharing data about clients with tiny companies is something else.

“We are operating in a world where we are experiencing the growing pains of moving into the Information Age,” says Internet law expert Solove. “Entire databases can be hacked into and data on millions of people can be stolen, transferred, sent around the globe, and broadcast to the entire world. The potential dangers are vast and we are woefully unprepared to figure out how to keep it all secure,” says Solove.

Solove says that instead of requiring consumers to opt out of sharing their personal data, financial service companies should be required to make opt-in offers. “This would foster greater accountability,” says Solove.

Paul Schott Stevens, an attorney at the Washington office of the Dechert law firm, and a former general counsel of the Investment Company Institute, points out that it would be difficult for financial services companies with tens of thousands of clients to service their accounts if they have to offer an opt-out when an individual client doesn’t want his information disclosed to a third-party vendor. “For a B/D with hundreds of thousands of accounts, what would they do?” asks Stevens. “They can’t customize a solution for everyone.”

Stevens has a good point. But so does Solove. So what’s the answer? Certainly the disclosures about who a financial institution shares data with should be more specific. In addition, it’s hard to imagine why financial institutions should not be required to offer consumers an opt-out for all third-party providers. Independent RIAs, who generally have hundreds and not thousands of clients, can tailor such requests to individual clients who want to opt out. In fact, some clients may prefer to do business only with an independent RIA because they may be the only ones that can properly respect their privacy concerns.

There are no easy answers. But advisors should confront the issue. “We have privacy practices that are appropriate for an age of paper records and haven’t adapted very well yet to an age where information can be downloaded at the click of a mouse,” says Solove.

I’ve long been a proponent for financial advisors acting as information sources for clients. You want to be the central source–on the Web and off–for clients to come to for financial news and ideas. You want to become their financial information gatekeeper. But part of the job means guarding the gates. With G-L-B, the gate’s under attack.

Keeping in Touch

TechFi adds a contact manager to its already impressive suite of offerings for advisors

For years, the one big wish I’ve heard from advisors is for a way to key in client information into just one database and have all the applications they use each day work from that database. Portfolio management, contact management, trading, and financial planning would all work in one integrated application.

It sounds like such a simple thing, but none of the companies serving small independent financial advisors do it all.

Centerpiece is close, but it works on two different databases. So you have to synchronize the databases to make them all work right. Centerpiece says it will migrate to Microsoft Sequel Server technology, but has not yet set a date to do so.

Advent Office can do it all. Axys is a great portfolio management system, Qube is an excellent contact manager, and Advent’s trading module, Moxy, works just fine. But advisors complain bitterly about the cost of Advent products, and they don’t like the fact that Advent runs off a proprietary database, so you can’t easily export data into other products. Then there’s the arrogant attitude that advisors often mention that they get from Advent’s support personnel.

But don’t despair. Those new guys from Denver, TechFi, are on the case. And it appears that the silver bullet that independent advisors have always searched for is a little closer to reality: TechFi has added contact management to its suite of products. I’d bet that this tiny, three-year-old company is going to be the first to come up with a totally integrated package.

TechFi’s Office Suite, which includes portfolio management, contact management, and trading, is bundled at $4,500 for a single user license; each additional user license is $1,000. Annual support is $1,500 plus $333 for each additional user.

TechFi’s pricing plan discourages unbundling the three applications. If you buy the portfolio management system with just one other module, it will cost $6,000 for a single user license instead of $4,500 for all three modules.

Adding a contact manager means that TechFi is closer than its major rivals to delivering that silver bullet. That’s because TechFi’s products all draw off a single open architecture database, Microsoft Sequel Server. Matt Abar, the president of TechFi, says a financial planning module could be added to the suite within a year.

TechFi provided an online demo of its new contact manager module for four advisors and all said they were impressed. Like other TechFi products, the contact manager program adheres strictly to the look and feel of Microsoft Office programs. You feel like you’re using Microsoft’s contact manager, Outlook, when you use TechFi’s contact manager. In fact, TechFi’s contact looks almost exactly like Outlook, but the names of the buttons and menu items are different, and the familiar interface includes functionality geared specifically to advisors’ needs.

Just imagine that you’re using Outlook and looking at all your contacts. That screen shows you all your clients in the TechFi program. When you double-click on any contact, you come to a client screen where you have fields for the client’s name, company, address, and other details. It looks very similar to Outlook, but there’s something that’s quite different in the six tabs across the top of the contact data screen.

The “Assets” tab lets you get a quick view of a single client’s holdings. So if a client calls to ask about his portfolio, you can see some basic holdings information and take notes about the client’s inquiry. From the Assets tab, you can pull down a calendar and see a list of holdings on a particular date.

Another tab–”More Info”–lets you track the names of other advisors, an accountant or lawyer, for instance, who work with a client. And a “Documents” tab lets you store letters and other documents that have been sent to a client. So if you have a client’s will you can drag and drop it into the client folder and make it easy to access from the contact manager.

The contact manager lets you schedule tasks, and you can share calendars to see what other colleagues have scheduled. You can establish workflow routines to remind you and other staff members to complete tasks. For instance, you can establish a routine for handling a new client, and a reminder may pop up in three days for your secretary to send a letter, and a week later your trader may be reminded to check on a transfer of assets–all part of a routine that you can set up. Abar says data can be imported from ACT!, Outlook, and Goldmine.

“It’s easy to use and intuitive,” said Jeffrey Schaff of Ardor Financial. “It’s hard to say whether it would be as good as ACT!,” said Jennifer Loper of Robert Osher & Company in Glendale, California, which is currently an Advent user. “But I’d be willing to give up some versatility to have everything integrated into one database.”

But as good as this all sounds, the one issue TechFi will have to overcome is skepticism from advisors.

“My major fear and the reason why I wouldn’t just buy this right now is that it’s still release 1.0,” says Gary Bowyer, of Gary N. Bowyer and Associates in Chicago. “I’m not a person who wants to experiment with software.

“The other concern I have is where these guys are financially,” says Bowyer, who uses Captools for reporting and ProTracker for contact management. “I’d hate to commit my practice and then six months later have them close their doors. I’m not prepared to make changes to get incremental increases in my capabilities, particularly with a piece of software that’s so critical to my practice.”

A.J. Diliberto of RTD Financial Advisors in Philadelphia voiced similar concerns. “My thought is that if it’s a great company now, it will be even better in a year or two,” says Diliberto. “We think that eventually, we will wind up converting to TechFi, but we’re not rushing in.”

The company has suffered growing pains, Abar admits. “We’ve had the same troubles that any company does when it goes from zero to 35 employees in two years.” Service issues and bugs are a concern to some advisors.

For instance, Diliberto says his firm ran a conversion several months ago from dbCAMS to see how a switch might work, but the transition was rocky. Diliberto says he is holding off for another few months before trying again.

Abar says TechFi is going to stop adding new products for the next few months and will instead focus development on its core portfolio management product, adding the ability to include exotic securities, for instance.

But keep it all in perspective. Dealing with the client data of hundreds of small advisors who all do things a little differently from one another isn’t easy. TechFi’s presence has lit a fire under Centerpiece and forced it to make some major improvements. It also forced dbCAMS to make improvements. TechFi’s innovative approach and entrepreneurial spirit has been a great addition to the technology mix.

And since TechFi started with a Sequel Server database, adding new interfaces with expended functionality is not that difficult. That’s why I think that if TechFi can wrestle with the business issues–tech support, bugs, and getting new users up and running smoothly–this upstart is likely to be the first software maker to deliver the silver bullet you’ve been waiting for.

Service, Please

CheckFree targets independent RIAs with a new portfolio reporting service, APL-ASP

CheckFree, a leading provider of financial electronic commerce services, is making a move into the independent advisor market. The firm has launched APL-ASP, a portfolio reporting service bureau aimed at RIAs with less than $500 million under management.

Rich Tierney, the product manager of APL-ASP, says the service bureau will cost from $750 to $2,500 a month, depending on the size of your business. The fee includes daily downloads and reconciliation from major custodians, quarterly reports sent electronically as Adobe Acrobat PDF files or as hard copy via mail, a trading module with straight-through processing to Charles Schwab, and a template for performance reports that can be customized to include the data you prefer and custom benchmarks. The system supports after-tax reporting and tax-lot information on individual positions, Tierney says. About 10 RIAs are already using the service bureau, Tierney says, including three or four with less than $100 million under management.

For an RIA with 100 clients and $70 million under management in 500 accounts, Tierney says APL-ASP will cost $1,250 a month. Expect to pay a $5,000 setup fee to convert your historic data to the APL database and to get about 20 hours of training.

The ongoing fees for the service would compare favorably with prices at service bureau rivals AdvisorMart, a service offered by TechFi Corp., and Advent Outsource.

CheckFree APL is better known to many advisors as Security APL, which is the leader in handling reporting for wrap managers in wirehouse programs.

Whether the firm can conquer the fragmented independent advisor market is another question. As I reported last month (May 2001, “The Revolution That Hasn’t Happened”), advisors have been slow to adopt Web-based applications. But APL is a large company and is aligning with the RIA industry’s most dominant custodian, Schwab Institutional, to deliver its product. “Instead of trying to do direct sales to RIAs, we’ve spent time trying to educate people at Schwab about our offering,” says Tierney. As an example of how the firm is wooing Schwab advisors, Tierney cites APL-ASP’s straight-through processing of trades with Schwab.

APL’s service bureau includes a trading application and decision support tools that let you do research before making trades. Trades from an advisor’s desktop go directly to Schwab’s trading desk for execution, says Tierney. The execution prices feed back into APL’s system and a night report matching trades against an advisor’s records is run. The trading application is included with the service bureau pricing but only works right now with Schwab.

Tierney says the service bureau has an interface to download advisor client data from Fidelity, but straight-through processing of trades with Fidelity is not yet working. An interface with Waterhouse Institutional is in the works as well.

Publicly held CheckFree has the heft to challenge Advent, the leading portfolio management software company. CheckFree’s bill-paying services are used by nearly five million consumers. Its products let customers receive electronic bills and statements and make electronic payments. Four years ago, Jersey City, New Jersey-based CheckFree purchased Mobius Group, a research and analytical company with a respected database of money managers, mSearch. CheckFree’s investment services division, which includes the former Mobius Group and CheckFree APL, has 300 employees, with about 225 of them working on APL, Tierney says. In addition to the mSearch database, the division also has a personal financial planning software package. With the money manager database, planning software, and portfolio reporting under one roof, the company could turn into a major vendor to RIAs.

ASP-APL is not a true ASP quite yet: It comes as an application that you install on your computer. APL-ASP downloads your client data from Schwab or Fidelity and you access it via the Internet or dial-up phone line directly to the system. The performance reporting service bureau will not be a browser-based ASP until the fall.

Moving Ahead

Charlie Haines plans to grow his practice tenfold by doing “life planning” for the wealthy

Charlie Haines, a Birmingham, Alabama, advisor with about $300 million in managed assets, says he’s raising $10 million and launching a seven-year business plan that would propel his firm from its current 23 employees to 300. Haines’ idea is to help wealthy families with all aspects of their wealth–from managing their portfolios and assisting with succession planning for their businesses to teaching their children about the value of money.

“Life planning is what some people call what we do,” Haines says. “We are trying to address more than money management.”

The Alpha Group, a study group for some of the nation’s best-known financial planning firms, includes Haines and Harold Evensky as members. The group has been influenced by a report by Undiscovered Managers’ Mark Hurley. He predicted that small advisory firms would face a competitive squeeze from large financial services firms in the next few years if they failed to find a market niche or grow in size to offer a diverse range of services.

Harold Evensky announced plans in May 2000 to create a “private family office” by raising $45 million in capital and creating a union of planning offices around the country with a central back office, marketing department, and planning department. Evensky named Richard DeWitt as president and CEO.

Following the decline in the stock market, however, Evensky put his plans on hold and his self-imposed deadline to raise capital passed at the end of March. He said at the time that funding the venture would have required using multiple sources of capital and he preferred to tap as few sources as possible.

Yet another setback occurred in mid-May when DeWitt and Evensky parted company. While Evensky says the parting was amicable, he declined to give any details other than to say it would push back his plan to raise capital by a couple of months. Still, Evensky, whose Coral Gables, Florida, firm manages more than $300 million, says he remains committed to his plan.

Meanwhile, Haines, who has quietly built one of the nation’s leading practices by focusing on wealthy families, is expected soon to distribute a private placement memorandum to raise the $10 million he needs, and reportedly has commitments from several clients to provide $1 million each.

Haines’ business plan calls for serving up a raft of services for families with a minimum of $10 million in assets. The services would include consulting on philanthropic giving, legacy planning, alternative investments, and the psychological aspects of managing wealth.

Unlike Evensky, Haines does not intend to merge with other planning firms. He plans to grow his staff and open satellite offices built around nationally known specialists in charitable giving, succession planning, and other niches. In turn, those specialists will tap into Haines Inc.’s financial planning expertise.

“We’ve been told by two consultants who have hundreds of clients in the financial services industry that no other firm in the country has the complete suite of services that we offer,” says Haines.

Haines says the psychological aspects of financial planning are critical in counseling wealthy families. “If you don’t have boxes of Kleenex in your meeting rooms, then you’re not doing your job as a planner because you are not getting to people’s dreams and core issues,” he says.

He says the skills needed by firms to provide this kind of holistic financial counseling requires different types of personalities on staff. “Money is just a means to an end,” says Haines, 46. “It’s the fuel for your journey, but it is not the journey. The journey to fulfillment involves a lot more than the six parts in the financial planning process.”