The two firms that advisors love and hate the most are at each other’s throats.
Charles Schwab & Co. is suing Advent Software Inc., touching off the greatest power struggle ever seen in the independent advisor business. For now, what we are seeing is a spin war as each side seeks to portray itself as acting in the name of advisors. But the outcome is likely to determine which of these two firms in the future will play the pivotal role in thousands of advisory firm back offices.
The legal fight pits two ruthless competitors in the independent advisor industry in a struggle for control over advisor relationships. Schwab’s suit, filed on November 8 in California Superior Court in San Francisco, charges Advent with breaching a December 30, 1997, agreement between the two companies. The agreement directly affects RIAs who custody assets at Schwab and use Advent’s portfolio management software.
Advent says in the agreement that it will maintain and support a software interface that allows RIAs using Advent software to download client data from Schwab. However, Advent has since launched a new way of conducting downloads, its Advisor Custodial Data (ACD) service. With ACD, instead of taking downloads directly from Schwab, advisors would get their downloads over the Internet from Advent. Schwab says Advent has not fulfilled its obligations under the 1997 agreement by failing to inform Schwab within 90 days that it was changing their deal.
Schwab’s lawsuit is cloaked in terms that make it appear to be the guardian of the rights of advisors. It charges Advent has misled advisors and used overly aggressive sales tactics to coerce them to switch to ACD while violating the agreement on their mutual customers. Schwab says that “through the Agreement, Schwab acted to preserve the ability of Schwab Institutional customers to continue using the existing interface instead of being forced to move to, and potentially pay more for, ACD.
“Since then, in fact, many Schwab institutional customers that use Advent’s Axys product and the existing interface have informed Schwab that they do not want to move to ACD because it will cost significantly more than the existing interface for functions that they simply do not need.” Schwab also charges that “Advent has been coercing Schwab Institutional customers into converting to ACD by offering limited-time, ACD subscription fee discounts if the Schwab customer converts within 30 days of Advent’s offer.”
The irony of Schwab defending the rights of advisors even as it introduces services that many advisors regard as competitive is equaled only by exhortations from Advent that it is seeking only to create choice for advisors. In an interview the day after the suit was filed, Irv Lichtenwald, Advent’s chief financial officer, said Schwab was resisting adoption of ACD because it would free advisors to choose any custodian they want. “An interface is point-to-point between one firm and another, one custodian and one money manager,” Lichtenwald says. “Advent Custodial Data is one money manager to multiple custodians.
“What’s in the best interest of investment advisors?” asks Lichtenwald. “Is it not to have technology to be flexible and take on clients with new custodians? It’s understandable why Schwab at the end of the day may not understand why its clients are better off with state-of-the-art tools.”
He adds that “Advent is trying to enable investment advisors to run their businesses in a fashion that they can take on more clients and provide them with the best services they can have and to do this, advisors need state-of-the-art tools. I can understand why a particular custodian may not like that the money managers have more flexibility in growing their business through multiple relationships.”
What’s happening? Schwab’s efforts in the 1990s made it the leader in providing custodial services, allowing it to dominate the business and attract about 70% of the assets managed by small RIAs serving wealthy individuals and small institutions. But technology is threatening to loosen Schwab’s grip on the independent advisor business. While Schwab is currently at the center of the relationship with advisors, ACD will put Advent in that pivotal position.
One Among Many
Advent’s ACD allows advisors to trade through multiple custodians as easily as through a single one because it has interfaces with dozens of custodial firms. Advent is one of a number of software companies offering this type of technology. Others include TechFi Corp of Denver, Checkfree of Jersey City, New Jersey, and StatementOne of Lawrenceville, New Jersey. But Advent, which is publicly held, is the best funded, has more advisor clients, and a lead over competitors.
While advisors should embrace more choice and greater competition for its business, which is the net effect of ACD, many are reluctant to embrace it because of their love-hate relationship with Advent. Advent has established a reputation for charging high prices for the mission-critical services it provides, and advisors are reluctant to become too dependent on it.
Lichtenwald points out that Advent has frozen prices for Schwab clients who move from the interface software to ACD for 12 months. You’ll pay nothing extra if you switch. Advent has also abandoned its initial pricing scheme, which linked the amount of data downloaded to the cost of ACD. He says that advisors should not fear a hike in prices on ACD. “I could understand why people might fan flames of fear on pricing,” he says. “But in reality, that’s like saying that Advent would build point-to-point interfaces and then charge $1 million a year for them later.”
Still, many advisors are reluctant to make Advent the key to their downloads, the central element of their back-office functionality, on a day-to-day basis. For advisors who have just one or two custodians, switching to ACD and allowing Advent to interpose itself as the pivot point for downloads instead of their custodian may be resented. For advisors with multiple custodians, switching to ACD may be welcomed.
For now, advisors who are clients of Advent and Schwab will want to watch the legal action. In a letter dated October 10, before filing the lawsuit, Schwab Vice Chairman John Coghlan asked Advent CEO Peter Caswell not to cease supporting the interface and to get together for a chat. Advent’s Brian Bailard, a vice president and general manager, replied to Coghlan on October 30, saying that Advent would continue to support the interface only if Schwab agreed to participate in Advent’s data aggregation service, Trusted Network, and pay a $250,000 annual support and maintenance fee for the interface.
A judge could act swiftly to enjoin Advent, or a settlement may be announced. Keep your eyes on www.investmentadvisor.com; I’ll update you on further developments as they occur.
Paying Bills, Avoiding Mail
Why advisors should help clients pay their bills, via the Web or the old-fashioned way
My wife was sprawled out on the bed, and not in the good way. “If I don’t feel better in the morning,” she said, straining to lift her head from the pillow, “I’m going to the hospital.”
Mindy normally is well grounded. I’m the crazy one. But she opens my mail (I get a lot of it). And this anthrax thing was getting to her.
I’m a news junkie, and the TV is on all the time in our house, and it started getting to her. Mindy had been coming down with a cold for a couple of weeks, while day after day the media offered anthrax updates. It came to a head that night in early November, when I came home to find her lying in bed. “Go to the hos
pital now,” I said. “Don’t wait. If you really think you have anthrax, the best thing is to go to the hospital.”
Mindy went to the hospital. Thankfully, it was a false alarm. But Mindy refuses to check our mail now. Which brings me to electronic bill payment.
Mindy’s fears are extreme. But other people who don’t think they have anthrax are scared to open their mail as well. This is an opportunity for financial advisors.
Why should you care about helping your clients pay bills? For one thing, the ability to get data out of bill payment solutions is important. Even for super high-net-worth individuals, it’s wise to track expenses. And for advisors who aren’t working with clients with multimillion-dollar net worth statements, such data is even more important. Many individuals who earn $100,000 or $200,000 a year are good advisor clients, and they have trouble budgeting and limiting expenses. Any bill payment solution you can offer should provide you with useful data output about expenditures, and excess spending can be cut and aimed toward achieving long-term goals. Plus, the more connected you are to a client, the better it is for your relationship.
The markets are uncertain and many advisors are looking for ways to add value to their client relationships. If you can help clients get bills online and pay them online, you’ll be adding value to your relationship. So I spent a few days exploring the options, both low- and high-tech.
Family Office Services
Some advisory firms are helping clients pay bills the old fashioned way, getting bills rerouted to the advisory firm and then assigning a bookkeeper to track them and make sure they are paid.
Joe Kopczynski of Universal Advisory Services in Albuquerque, New Mexico, bundles bill-paying services with his firm’s family office services. Universal’s family office services fees are based on net worth and not assets under management. The fees are on a sliding scale starting at 1% and declining to 15 basis points for individuals with a net worth of $50 million or more. “We do everything , right up to signing the checks,” says Kopczynski.
While Universal and many other RIAs have a limited power of attorney allowing them to make changes in a client’s portfolio, signing checks would require another type of power of attorney. It would also mean that the firm is effectively taking custody of a client’s assets, and that would trigger additional regulatory burdens not now fulfilled by most RIAs, including the need for an audit annually. “If a client is vacationing in China, we will send them a Fed Ex in Beijing with their bills attached for their review and the filled-in checks for them to sign,” says Kopczynski.
Bill paying is only one part of the firm’s family office services, but it allows Universal to match concierge services offered by large trust companies while maintaining personal relationships with clients . About 10 clients, all with a net worth in excess of $5 million, use the bill payment service.
Kopczynski says his firm receives all the invoices instead of the clients, or it helps the clients arrange for automatic debiting of expenses. If a client asks for it, Universal will review bills to look for big jumps in expenses or unusual account activity. Steve Sparks, CPA, the tax manager who is responsible for the service, says that although Universal is not an accounting firm, it does some accounting work for this select group of clients. “Our responsibility is to make the lives of these people as good as we know how,” says Kopczynski. “People with wealth travel a lot and lead complicated lives. Bill paying, the way we do it, is just one thing we can do to make their lives better and give them peace of mind.”
Just Outsource It