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A Software Delay That's Good News

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This column marks the start of my eighth year writing for Investment Advisor. I am proud but humbled that we’ve never been asked to publish a factual correction to my approximately 500 stories. The privilege to share my ideas with you is not something I take lightly, and I pledge to continue to give you straight facts and intelligent analysis.

But enough about me.

Charles Schwab announced in early July that it is postponing its long-awaited portfolio reporting service bureau (PRSB). Service bureaus figure to be an important alternative for registered investment advisors to outsource portfolio accounting, and Schwab Institutional is the largest provider of custodial and technology services to RIAs. While the decision sounds like a bad thing, it’s actually not. So let’s look closer.

Schwab’s service bureau is delayed because the company has not completed a reengineering of its portfolio management software product, Centerpiece. Schwab said 23 months ago that it would release a next-generation, open-architecture version of Centerpiece in early 2003. Schwab also said in that September 30, 2002, press release that it was changing the name of Centerpiece to Schwab PortfolioCenter, and changing the name of its subsidiary that licenses Centerpiece from Performance Technologies Inc. to Schwab Performance Technologies.

Schwab’s marketing plans were well ahead of its software development. Though the company’s Web site markets PortfolioCenter, the software is not yet available. With the project to reengineer Centerpiece into PortfolioCenter delayed, Schwab has had to postpone the launch of its outsourced performance accounting solution.

Schwab is reengineering Centerpiece to run on a Microsoft SQL database. An SQL database will be more stable and scalable than the current database Centerpiece runs on. Unlike that database, SQL offers open database connectivity (ODBC), which makes it easier to integrate your portfolio management software with financial planning, customer relations management, and other software programs central to running an RIA business. Schwab’s Web-based service bureau for portfolio reporting would also be more stable and scalable on an SQL-based portfolio accounting software. For a competitive outsource service bureau to get off the ground, in fact, the SQL migration needs to be completed.

In a July 8 letter to customers, Deb McWhinney, Schwab Institutional’s president, said she was “fully committed to delivering the full system in early 2004.” The redesign of Centerpiece was “more complex than originally anticipated,” she said, describing it as a “massive undertaking–not unlike the conversion from DOS to Windows in the personal computing industry–and involves rewriting over 3.5 million lines of code.” A Schwab spokesman says that while Centerpiece users would like to see the SQL version launched tomorrow, they are being “patient and understanding.”

This clears up any doubts as to what was happening with the SQL project. I had begun to wonder if the project was technologically so daunting or if Schwab had been slow to roll out an SQL version because putting its portfolio management system on an ODBC-compliant backbone would make it much easier for RIAs to quit using Schwab’s system and move their data into another system. In fact, while McWhinney’s July 8 letter focused on the service bureau being delayed, the real news is that Schwab is delaying that effort because it wants to focus resources on the reengineering SQL project.

For years, the two portfolio management applications most RIAs use–Advent Axys and Schwab PC–have relied on databases that were not ODBC-compliant. The programs, which hold the lifeblood account information of an RIA practice and are used by about 7,000 advisory firms, both rely on “closed” databases that make it difficult to pull out data cleanly, especially if you have years of historic account information.

That’s why it was such a big deal when in December 1998 Portfolio 2000 came on the scene. It challenged the standard-bearers by relying on an open SQL database. Its purchase by Advent for $25 million in June 2002, however, along with a recent announcement by Advent that it would stop supporting the desktop version of Portfolio 2000 in January 2005, means the end of a desktop version of this open-database system. Advent says it will migrate the 300 or so Portfolio 2000 users to a Web-based version, but a lot of RIAs prefer to run portfolio reporting software on their desktop.

When I speak at conferences, I often ask how many advisors are using a service bureau or Web-based portfolio accounting application. I have never seen more than four or five hands raised for every 100 people in the room. Most RIAs still prefer to have their data sitting on their desktops or network servers. They generally remain squeamish about letting their data be managed remotely by a service bureau, or allowing their data to reside on a Web server hosting their portfolio accounting application.

Some advisors have specific concerns about giving Advent or Schwab control or access to all their account data at all their custodians, which is what would happen if they sign up for a portfolio reporting service bureau or Web-based application. (Advent already offers its own service bureau.) Some advisors simply prefer not to entrust any company with all of their customer account data.

RIAs are entrepreneurs who like to run their own show. They covet their ability to do business on their own terms. To the extent they rely on a service bureau or Web-based application to get their account data on their customers, I believe advisors feel they compromise their ability to control their own fate. And RIAs fiercely resist efforts that they believe could compromise their independence.

Which is why Schwab’s decision to postpone its service bureau to focus on completing the re-architecture of Centerpiece to SQL is good news for RIAs. An SQL portfolio management software application should support your independence and freedom to control your own fate, making it easier for you to export client data out of Schwab’s software and into other applications. Schwab is taking a daring step in giving you that freedom.

And at least one new challenger is on the scene that you could switch to, Optima Technologies’ Interactive Advisory Software. That SQL-based desktop software, which will also be sold in a Web-based version and with a service bureau, has been offered for only a year, and is still being perfected. However, the company is run by an experienced software entrepreneur, Herzl Hyton, who has the cooperation of a core group of financial planners in developing its software, and reliable industry players tell me Optima is close to becoming a competitive threat to Axys and PortfolioCenter.

More significantly, Schwab’s decision to ease an RIA’s pain when converting out of its portfolio accounting system is a sign that the reality of the market is being felt: Even the most influential firms RIAs depend on must ultimately yield to RIA independence. It is probably no coincidence that key marketing executives behind the technology plans drawn up two years ago by Schwab left Schwab in recent months, never completing aggressive plans to create a proprietary technology platform. I believe it all adds up to signs that independence is winning, and that’s the real news behind the Schwab announcement that it was postponing its service bureau.

The other significant news to come from the announcement is that Schwab is shortening its list of vendors that Centerpiece users can rely on for outsourcing. In delaying the launch of its own in-house service bureau that was to be administered by Schwab Performance Technologies, Schwab will now make referrals to Back Office Support Services (, Etelligent Consulting ( and B-Ready Software Solutions ( These are three respected independent vendors that each have their own way of serving advisors and I hear good comments from advisors about all three.

Schwab had conducted extensive beta testing on its own service bureau over the past year using the current version of Centerpiece, with more than a dozen advisory firms participating. But the reality was that Schwab will not have a service bureau until the SQL project is done, and Schwab says that won’t be until early 2004.

Operating a service bureau from a desktop application is inefficient, and that is particularly true of Centerpiece. The service bureau must download the RIA’s account data and reconcile it before the RIA starts the day at 9 a.m. Often an account database cannot be reconciled by 9 a.m., so it is delayed till later in the day. If in the meantime the RIA firm changes the database and then later gets a new version from the service bureau, it could cause confusion and compromise the integrity of the database. Since Centerpiece has no way of tracking whose version of the database was last saved and has no security controls, running the service bureau on Centerpiece could have been a challenge. It’s also fair to say that continuing to provide 15 or so RIAs with a free portfolio accounting service while the SQL project moves forward was not financially attractive to Schwab.

When the SQL project is done, a Schwab service bureau will be much easier to operate efficiently. It seems like a fine idea that Schwab has stopped work on the service bureau for now. This is especially true because many advisors have been so slow to adopt outsourcing portfolio reporting and are likely not to be all that interested in letting Schwab see data on all of their clients’ assets–including those held at other custodians. Offering a Centerpiece outsourcing service through three independent vendors makes sense as well.