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Portfolio > Portfolio Construction

Abar's Big Aventure

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Who could blame Matt Abar for selling out to Advent? When you’re 31 and are offered more than $11.5 million for your share in your growing but struggling company, selling is a pretty good way to go. It’s safe to say that just about any independent advisor would do the same. But the announcement of TechFi’s planned acquisition by Advent Software for $23 million in cash last month is a loss to the independent advisor channel. Abar and TechFi injected competitive vitality to this fragmented channel of the financial services industry.

A week after the deal was announced, Advent announced the purchase would be delayed while the U.S. Justice Department’s antitrust division conducted a preliminary investigation of the proposed acquisition. But the antitrust division in recent years has not exactly been aggressive about stopping combinations, so killing this deal would be a huge surprise.

The independent advisor market is exciting, yet frustrating, because it is composed of thousands of entrepreneurs doing their own thing. I wish my good friend Matt Abar, who started TechFi in his living room, well. But I mourn the loss of a small company that could have accomplished much more for advisors had it remained independent.

Tiny TechFi, with its 42 employees, is now in the deft hands of Advent, a publicly held giant with 800 employees and a business plan to dominate independent advisor desktops. On June 10, the day the TechFi deal was announced, Advent also announced plans to slash up-front prices for its software and increase annual maintenance costs in order to get additional market penetration.

Although Advent has never done a very good job of attracting independent advisors and has instead focused on serving the more lucrative market of institutional money managers and hedge funds, Advent may now be serious about going downstream and getting greater market share among financial planners and RIAs serving high-net-worth individuals. That’s what the new strategy, including the purchase of TechFi, is about.

Technology Galore

Advent says it plans to keep alive TechFi’s product line targeted at independent advisors, and to nourish it. But Advent did not buy TechFi for its technology. Advent has plenty of that. Advent is simply on a march to achieve dominant market share in advisor technology. It is shrewdly pursuing a goal and outflanking competitors in its way.

Not that it’s so tough. Apart from TechFi, the only serious competitor to Advent in the portfolio management software arena has been Centerpiece. But Charles Schwab & Co., which owns Centerpiece, recently stopped selling new Centerpiece licenses to any advisor who does not do business through Schwab’s Services for Investment Managers division.

Only time will tell if Advent has changed its culture, shed its reputation for arrogance and aggressive pricing, and will suddenly become a faithful partner to independent advisors. My guess is Advent will take advantage of the dearth of competitors in a swift bid to gain dominance. Suddenly, Advent software, and maybe its TechFi products, will be cheaper for you. But watch out. In two or three years, when Advent gets enough market share, prices could rise again.

It’s not an original strategy: Look how well it has worked for Microsoft. But I’m not sure it will work for Advent. In fact, not only might Advent fail to dominate your desktop, but so might Schwab. The reason? Many advisors are wary of these companies and fear being trapped by them. And alternatives will be coming.

TechFi’s Beginnings

But before exploring Advent’s strategy in depth and the news on TechFi, let’s recap TechFi’s 31/2-year history. In December 1998, my phone rang. It was Robert Major of TechFi. Only 30, Major already was a veteran of the financial advisor software arena. In the early 1990s, he served a two-year stint in marketing at dbCAMS, a portfolio reporting software system. dbCAMS had great success in the 1980s and early 1990s. But it tragically lost its founder, David Huxford Sr., in a September 1994 plane crash. In more recent times the company has been struggling.

While working at dbCAMS in customer support, Major befriended Matt Abar. Then 21, Abar was a classic computer geek who had often chosen to skip college classes and stay home to play video games and fool around on what was the nascent Internet. Abar dropped out of college and worked in tech support at dbCAMS for eight months with Major in 1993, but then the two went their separate ways. Abar moved to Denver to work for Investment Advisor Network, where he learned about portfolio reporting. By the time he left IAN in August 1998, Abar had decided he was going to write his own portfolio reporting software package.

Abar closeted himself in his townhouse in Denver for three months and emerged in December 1998 with a working version of the program that he would call Portfolio 2000. Along the way, he had called Major and asked him if he wanted to be the marketing director of his new company for a 20% stake. Major, now an independent consultant in Maryland, dropped everything and moved his family to Denver.

Few Choices

When Major told me about the program, I was intrigued. I had already figured out that portfolio management software was “data central” for a practice. Yet there were woefully few choices available. Advisory firms with less than $100 million under management favored Centerpiece; Advent was for those with more than $100 million. But Schwab owned Centerpiece, and advisors often complained about its lack of fixed income capabilities, its painfully late conversion to Windows, the fear that the San Francisco-based broker would use Centerpiece to control the advisors’ business, and its lack of sophistication compared with Advent. And Advent users complained that the company was arrogant, expensive, and nickeled and dimed them for things like custom reports that should have been included gratis. Both programs had a glaring flaw: a closed database. This made it extremely difficult for an advisory firm to export data into an Excel spreadsheet, planning program, contact manager, or other applications–a feature that would seem to be a fairly straightforward request to make of a software vendor.

So when Major told me that Portfolio2000 would have an open Microsoft SQL database and use Windows-like menus and interfaces, I asked him if I could try out the program. Actually, I asked him to send me a copy and allow three advisors to load it on their computers. The review turned into a hopeful story about a promising new company. But my first review of P2000 left out a little problem: When advisor Ken Schapiro of Condor Capital in Martinsville, New Jersey, installed the program, it blew up one of his computers. He actually had to reinstall Windows to get the computer to work again. (I am now publicly apologizing, Ken.)

Despite that glitch, it was clear that TechFi was on to something big–a modern-day David-versus-Goliath saga. Indeed, Advent and Centerpiece had engendered so much discontent among advisors that TechFi received steady streams of sales leads for months. The company moved out of Abar’s townhouse and hired a salesperson. The program was still buggy, but the technology was promising, and by mid-1999 advisors started to buy it.

Abar had built Portfolio 2000 with the Internet in mind, and he wrote an enterprise version of his program that could be installed on a network server in tandem with a Web server. It allowed reports to be accessed over the Internet. In October 1999, after installing the system on my home-office computer, I reviewed that program in Investment Advisor. Carol Grosvenor, then a computer consultant, also installed it and she praised it as the portfolio management software system of the future.

With the enterprise version, an advisor could have satellite offices that could access reports over the Web. Clients also could be given permission to see some reports. But perhaps the biggest breakthrough was that tiny TechFi was going to sell the system for about $12,000, while Advent was charging three times as much for equivalent functionality in its Browser Reporting for Enterprise Users (BREU) program. Moreover, Abar was planning on creating a service bureau business using the enterprise software technology. The service bureau, to be called AdvisorMart, would download and reconcile all of an advisor’s account data daily for $50 per year per account.

In April 1999, First Trust, the Denver trust company that owns DATAlynx, bought a stake in TechFi for about $250,000, giving Abar and Major some operating capital. In June 2000, while Internet mania was raging, Morningstar invested $3 million in the company. Morningstar became a strategic partner in TechFi but would never figure out what to do with it. And it was certainly a surprise when Advent made its initial bid for the company about two years ago. At the time, a source familiar with the negotiations told me that Advent had offered $25 million. Abar turned Advent down. Asked about the incident in an interview last month, Major would not discuss details but did say that he wanted to sell out then. However, “Matt said we were just getting going,” Major recalls.

Not Just Growing Pains

Over the last two years, TechFi continued to grow. At industry conferences, the company’s booth was often swamped. Abar added a contact manager and trading platform, and was planning to tack on a financial planning package. AdvisorMart, the Web-based service bureau, became a reality. TechFi now has 500 customers, two-thirds of whom use its flagship software suite of portfolio reporting, contact management, and trading features at a cost of $4,500. The rest use AdvisorMart.

But as TechFi became inundated with sales requests and service requests, its growing pains turned into a business problem. Complaints became serious about two years ago. To be sure, serving independent investment advisors is a tough business. Advisors often want stuff for free or on the cheap, are very demanding, and want customized technology solutions. But there were real problems with TechFi. One advisor called me recently to say he had been unable to run reports in Portfolio 2001 for two weeks after installing an upgrade. A second advisor at a large firm told me he tried unsuccessfully for months to convert his firm’s Advent data to TechFi. And others complained that calls to TechFi were not returned or service was not delivered.

It was not for lack of trying, however. But while Abar is a complete workaholic, meeting the demands of hundreds of advisors when you’re only getting a license fee of $1,500 per user per year can be difficult. So in the last 18 months, Abar changed the focus of the company away from selling to individual advisors and toward selling to broker/dealers. AdvisorMart’s technology would become the reporting system to be used by B/Ds with hundreds of reps. Instead of struggling for a single $5,000 sale, TechFi geared up and cut deals in recent months with American General, Citigroup’s Travelers high-net-worth services arm, and is still working on other big B/D deals. With much more economies of scale, a single sale could be worth hundreds of thousands of dollars a year to TechFi.

But as TechFi charted a new course, Abar could see his company running low on cash despite a price hike last fall. “Our current investors had more than stepped up,” he says. “We actually had at least a 12-month runway.” But “in the next 12 months, we would have to either raise more money or find someone to partner with. Advent was an obvious choice.”

At the time of the Advent purchase last month, according to various reliable sources, Morningstar owned a 23% stake, DATAlynx 8%, Major 15%, and Abar owned the balance.

So what happens now? Collin Cohen, executive VP for corporate development and client solutions at Advent, says all of TechFi’s products will continue to be sold and supported. Eventually, the TechFi name will disappear, he says, but the products now sold by TechFi will live on. “We’re actually adding resources to TechFi so it can continue to build out products directed at small advisors,” says Cohen.

I asked Advent for details about its new pricing for its Office Essentials discount program for independent advisors. Advent Office Essentials (AOE) will be offered to firms with up to $100 million in assets under management. It consists of an Axys license, prepopulated with the firm’s data and configured to the firm’s specifications; two custodial interfaces with data flow; implementation by a certified Advent consultant; a three-part online training series; Advent user manuals and documentation; and ongoing technical support.

AOE can be purchased on a term/subscription license basis. For firms with up to $50 million in assets under management, the cost for a single user license for the first year is $2,500, which includes a one-time setup fee. For subsequent years, Advent Office Essentials will cost $1,500 per year.

For firms with between $50 million and $100 million in assets, the cost for a single user license for the first year is $10,000, including a one-time setup fee. For subsequent years, the fee is $6,000 per year.

In June, Advent announced that it will sell Advent Office in one of two ways: with a perpetual license, where a firm buys the software up front and then pays an annual maintenance fee; or on a term-license basis, where the firm signs on for a three-year license and the cost of the software is spread over the three years. By contrast, Advent Office Essentials will continue to be sold only on a term-license basis.

Little Overlap

Advent’s Cohen notes that there is actually little overlap between the customers Advent serves and TechFi’s core market. He says TechFi focuses on registered reps, financial planners, and RIAs, while Advent concentrates on money managers and institutional investors. He says Advent’s existing product line is for asset managers who use derivatives and sophisticated fixed income functions, while TechFi serves reps and RIAs who are more focused on mutual funds and variable annuities.

Cynics say that Advent will bury TechFi’s superior technology. “Let’s face it, Advent took out a competitor,” says Mitchell Porche, president of C3 Financial in San Diego. Porche, who developed account management tools for Jack White and TD Waterhouse Institutional before starting his own consulting firm, says Advent paid the $23 million to take out its competitor because of its open architecture. He points out that the purchase came a couple of months after the announcement by Schwab that it would stop selling Centerpiece to advisors who don’t do business through Services for Investment Managers, and that the purchase now clears away the only competitive impediment to Advent dominating the market.

“Advent didn’t need to buy TechFi’s technology,” says Porche. “They already have the custodial interfaces and it is a large publicly held company with great resources. And anyone who believes this was a strategic decision on Advent’s part to integrate the two technologies ought to have his head examined. This was purely done to get rid of a competitor.”

Indeed, on June 10, the day the acquisition was announced, Advent’s chief financial officer, Irv Lichtenwald, held a conference call for analysts and announced a fundamental change in pricing strategy. Advent would cut the upfront cost of purchasing its software while raising the annual maintenance price. Lichtenwald said Advent was in the razor blade business. It’s the old Gillette strategy: Give away the razors and charge for the blades. TechFi, with its attraction to the low end of the Advent market, was a key part of the plan.

Whether Advent can pull it off is a big question. Many advisors simply don’t trust the company because of its reputation for arrogance and its history of high prices. More than one advisor said he would avoid getting entrenched in the Advent system, even with a lower entry price. Why? They fear that in two or three years, if it dominates the software market, Advent will raise prices again. That may even happen sooner. Carol Grosvenor, a financial planner and former computer consultant to the financial services industry, thinks “it will take Advent less than year to hike prices. Advent announces that they cut prices almost on annual basis, and then they creep right back up.”

Limited Choices?

Moreover, converting from Advent Axys will remain difficult because of its closed database architecture. And the uncertainty around the future of the TechFi products will take months to evaluate as the transition into making TechFi an Advent division continues. For now, your portfolio management software choices are pretty limited.Which brings us back to Schwab and its Centerpiece strategy. It is ironic that Schwab may have encouraged Advent’s purchase of TechFi. It became a much more attractive acquisition target after Schwab said Centerpiece would no longer be available for purchase to first-time licensees unless they do business with Schwab Institutional.

Despite the potential for Advent to gain market share, numerous Wall Street analysts didn’t like the idea of the TechFi-Advent combination and price-cutting strategy, and some downgraded Advent’s stock. In fact, Advent stock plunged by nearly 40%, to around $25, after the announcement. The decline came after the stock had already fallen 40% since March, when it traded above $60.

It’s true that Advent has plugged a leak by purchasing TechFi. Now, it hopes its stock price will balloon back to trade at 41 times earnings, as it did before the TechFi acquisition. But the TechFi purchase will only be a temporary solution. A new TechFi is bound to pop up. America continually spawns software geniuses like Matt Abar. Advent cannot keep buying out every company that challenges it, and proprietary platforms built by custodians will not stop new companies from filling the void created when they try to control independent advisors. Porche points out that already, “there are other players on the periphery, like StatementOne and ByAllAccounts. But none have the capabilities of TechFi.”

So any time now, another entrepreneur will turn up with a better idea for handling portfolio reporting for investment advisors. In fact, there’s my phone. Gotta run.


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