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Portfolio > Portfolio Construction

Judge Rules for Schwab in Advent Case

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Editor-At-Large, Investment Advisor

Two firms that are dominant in the independent advisor market–and which advisors often say they mistrust–received a court judgment this week that appears to be a victory for independent advisors and the way they prefer to do business.

Advent Software, Inc. lost its power play against Charles Schwab & Company when a California Superior Court judge issued a preliminary injunction on January 14 ordering Advent to continue to support its download interface with Schwab for at least 90 days. The judge also ordered Advent not to interfere with Schwab’s effort to create its own download interface or with any other third party’s effort to do so.

“For a court to enter a preliminary injunction against Advent,” says Nick Georgis, VP of sales at Schwab Institutional, “it had to think that we were likely to win the suit on its merits.”

The immediate effect of the order handed down in San Francisco by Superior Court Judge James J. MacBride is to force Advent to give its customers support through April 14 for an add-on to its popular portfolio management software, Axys. The add-on allows advisors using Axys who custody client assets at Schwab to download their client data.

Schwab had argued in court papers filed in December that Advent violated a December 1997 marketing agreement by failing to inform Schwab within 90 days that it was changing their agreement by switching advisors to a proprietary Advent interface called Advent Custodial Data service (ACD) and terminating the existing point-to-point download interface. That interface is used by advisors to download their portfolio data from Schwab and other custodial firms. While the judge did not make a final ruling on all aspects of Schwab’s lawsuit, the strong language in the preliminary injunction leaves little doubt that the court agreed with Schwab. The judge enjoined and restrained Advent from “Interfering in any way and at any time, whether by legal means, technical means, or other means, with Schwab’s development, distribution and use of a replacement interface for the Existing Interface.”

What’s It Mean?

The court’s ruling could have much broader implications beyond the Advent-Schwab relationship. It could free other custodians to develop their own interface with Advent, and deal a setback to Advent’s plan to gain a mass migration of advisors to ACD. Such a migration would place Advent in a more pivotal position in its relationship with advisors, allowing Advent to interpose itself in the daily data downloads from custodians that are the lifeblood of an investment advisor’s practice.

With the point-to-point interface, an advisor uses a piece of software that allows Advent portfolio management software to “talk to” a custodial firm’s back-office mainframe computer. The interface that resides locally on your computer and that Advent charges $750 a year to support uses an encrypted Internet connection to download the data.

But with the new Advent Custodial Data service, Advent downloads all of an advisor’s files to a central server, and then advisors download their client data–from multiple custodians, if applicable–from that Advent server. The benefit is that you don’t need multiple interfaces to each custodian, but instead make a single download from Advent. Advent says ACD is simpler and will ultimately be less expensive than having to buy multiple interfaces.

Suspicious Partners

Advisors often describe Advent as arrogant and say the company raises prices once you are locked into using its Advent Office package, and advisors also have fears that Schwab’s expanding retail presence and purchase of U.S. Trust have marginalized the importance of advisors to the company.

Schwab and Advent have dominant market share in their respective niches. But changes in technology have made their 1997 agreement to market each other’s products and services outmoded. Advent’s ACD service, and other technology services like it, frees advisors to pick any custodian they wish. While Schwab has dominated the industry and most advisors do almost all their business through Schwab, technology is freeing advisors to clear and custody assets anywhere.

For now, many advisors would prefer the point-to-point interfaces because they use only one custodian. To them, paying the $750 a year and making their businesses to be heavily dependent on one custodian, such as Schwab, is acceptable. They may prefer to not be totally dependent on Advent as well as Schwab for daily downloads to run their businesses.

Advent historically raises prices 15% annually, according to advisors who buy its products. When it originally launched ACD, Advent had planned to charge advisors based on how much data they downloaded over the system, and had planned a 15% price increase for ACD in 2003, according to a an Advent client who signed up for the service. But when advisors protested, Advent backed down and changed its pricing. The company agreed to hold the price on ACD through 2002 at the same level that would have been charged if you had bought the point-to-point interface. Still, many advisors fear annual price hikes on ACD would squeeze them and they’d have no choice but to pay because changing portfolio management systems is so time consuming. The court ruling could hurt Advent’s ability to raise prices for ACD in the future, however.

Advisors with most of their client assets at Schwab and a small percentage of assets at other custodians could use ACD to make downloads at a disparate group of custodians, and then use the point-to-point interface with Schwab to download the majority of client portfolio data. If Schwab charges a flat fee for its point-to-point interface while Advent reverts to a charge based on the amount of data downloaded, as is widely expected, Schwab advisors would avoid any attempt by Advent to aggressively raise prices.

The court order thus seems to offer the best of all worlds for advisors. For those who wish not to be dependent on one custodian, they can use ACD and make a single download of client data from Advent’s ACD server. For those who wish to stick with one custodian and not be dependent on Advent as well as Schwab, they are likely to have a Schwab-supported interface in about 90 days, when the court order expires. By then, a permanent court ruling on the case is likely to be announced, which will further clarify matters. But it looks like a judge has wisely decided to give advisors a choice by allowing custodians to develop their own point-to-point interfaces with Advent while Advent tries to encourage advisors to switch to ACD so they can use any custodian they please.


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