Yes, the Rich Are Different

Complicating the accounting down the road, Snyder says Jerry will have the hospices revalued, and may tell investors the shares bought at $10 are now worth $25, and that the stock is splitting three for one. But working with capital calls and all the complications posed by alternative investments is not the great strength of the portfolio management systems currently used by advisory firms. PCR has been engineered from the start to do this, Snyder says.

Just the Start

Gathering the data and inputting it into PCR is done several ways at the company’s Wilton, Connecticut, office. Snyder says PCR gathers data now from a total of about 400 record-keepers. Data from about 200 institutions–hedge fund managers, general partners of oil and gas ventures, commodities pools, and real estate deals–is manually gathered by mail, phone, or fax. In addition, the system is fed by electronic interfaces with about 100 custodians. Finally, another 100 or so unique assets are inputted manually representing an eclectic assemblage of items such as artwork, airplanes, and farms.

Snyder says that PCR’s devotion to delivering accurate, timely information to the high-wealth individual is what makes his company unique. Snyder believes that technology companies like StatementOne, Investigo, Yodlee!, CashEdge, Schwab PTI, Advent, and ByAllAccounts are not interested in doing what PCR is doing. “We do not compete with them,” he says. In fact, Snyder says he “in discussions” with two such technology companies about using their “pipes” to feed PCR with data. “All we want to do is gather the data,” he says, “and we don’t care if we need to use Advent or other aggregators to do some of it, as long as it helps us bring all the data together efficiently.”

What’s to stop the technology platforms from adapting their platforms for collecting client data to Snyder’s business model? “We are the leading authority on gathering information for and about high-wealth individuals,” says Snyder. “We will do it better than anyone else–it’s our niche. Why doesn’t Coke make Merlot wine and why doesn’t GM make cars that are as good as a Mercedes?”

“Companies that make money focus on delivering a set of products and services to a community of like-minded people, and our community of like-minded people are high-wealth advisors and, through them, their clients,” says Snyder.

Three Differentiators

What’s unique about PCR, Snyder says, is that it has mastered several complicated challenges: accounting for complex assets, normalizing data from different systems, and reconciling it all. “In the non-high-wealth world, the assets are principally listed securities–bonds, stocks, and mutual funds,” says Snyder. In the high-wealth world, they are complicated stock options, oil and gas deals, private ventures, wine collections, private partnerships, different forms of restricted stock, hedge funds, foundations, endowments, trusts with multiple beneficiaries, and assets with complex accrual and cash treatment. “Most of that capability would be wasted on a non-wealthy household,” Snyder notes. “But without it, the high-wealth individual gets a snapshot of perhaps only 30% of his affairs when handled by existing solutions.”

The second difference, normalization, has to do with the fact that each custodian has its own chart of accounts and transaction codes. One custodial system might call a transaction a “purchase,” while another calls it a “buy.” Snyder says management of these heterogeneous systems, each with their own accounting language, is called “many-to-many mapping” and presents one of the biggest challenges programmers must face.

Tania Neild, PCR’s chief technology officer, was a co-founder of Envestnet PMC, a separate account management platform, and earlier in her career she was an applied scientist for the National Security Agency where she specialized in data integration and mining program development. Neild structured PCR to allow a buy by a hedge fund to be recorded in much the same way as a buy of stock or private equity, so data across different databases are normalized. Getting this to work across different currencies will be tackled this summer, Snyder says.

The third differentiator, and the most difficult task PCR faces, Snyder says, is reconciliation. “This is a dirty, expensive process,” says Snyder. When there’s a spinoff or when a custodian misclassifies a cash distribution as a receipt of federal funds, it may not get caught without performing the labor-intensive task of examining yesterday’s list of holdings and values, examining the changes you made today, and then reconciling them. While service bureaus may do reconciliation, it is usually up to an advisory firm to check the work. I’ve heard mixed reviews of service bureaus that were reconciling for advisory firms, and they only handle listed securities and bonds–not the more complicated assets Snyder says PCR is handling.

PCR Pricing

In keeping with its innovative ways, PCR plans to charge advisors differently than other technology and service providers. Snyder says PCR will charge on “Wealth Complexity Units.” Moreover, he suggests advisors also adopt a price model based on the complexity of the lives of their clients.

“There is little relationship between how wealthy people are and how complex their lives are,” he says. “If I have $40 million in funds and you manage it all in mutual funds–and I’m not suggesting you do that–then there isn’t much to do. On the other hand, if someone with $40 million owns two farms, a business, three life insurance policies, and two trusts, and has three children, an ex-wife, and two stock option plans from previous employers, that’s a complex guy, and you need to get paid for that.”

As an example of the smallest advisory firm that might want to use PCR, Snyder says an advisory firm with 100 clients, each with an average $2.5 million in four accounts invested across 25 stocks, bonds, or mutual funds at two custodians, would pay about $24,000 a year for PCR Insight. Snyder says that although he is not focused on advisors with such simple businesses, it could make sense if that advisor has two or three clients with $10 million or $20 million of investable assets and wanted to make the super-wealthy the main focus of her practice in the future.

A more typical engagement would involve a client with $18 million in wealth with an array of stock options, insurance, private ventures, hedge funds, and a complicated trust. That would cost an advisor $4,000 a year, although putting 25 or 50 such clients on PCR Insight would result in additional savings. Keep in mind that this gives your clients total access to view their accounts the same way you can, although only the most sophisticated clients are likely to maximize its potential.

Snyder says advisors should also consider charging based on the complexity of a client’s life because it will be more rational. He says charging based on assets under management and using break points for larger clients is a “cruel trap.” Taking that approach, “You wind up discounting the value of your advice to the very people who probably need it the most,” he says. “Basing fees directly on the value of the advice you provide frees you from that cruel paradox.”

What Do They Want?

So what do the super-wealthy want, and what do they value most from their advisors? The latest survey by Spectrem Group (see sidebar at right) seems to provide good news for independent advisors serving the super-wealthy, since it reports that advisors and financial planners have gained market share from brokers and that the wealthy are more satisfied with advisors and planners than other financial intermediaries. The Spectrem findings are great stuff, but remember that it’s based on a survey.

A survey measures what people say they think, what they think they think, and how they think they behave. That can be a far cry from the truth. For instance, 52% of those surveyed by Spectrem say they’d prefer an advisor unaffiliated with a product provider, yet only 38% work with independent advisors. People say things they don’t mean or act on all the time. In contrast, Snyder wants to glean the preferences of the super-wealthy based on data about how they actually behave.

For instance, PCR has about $2.3 billion of assets on its Insight platform with an average household median wealth of $23 million. The median amount of wealth spent on personal use assets–houses, aircraft, boats, cars, and collectibles–is 14%. Of those on the system, 79% own two or more homes, with the median value of the primary residence at $2.3 million and the median value of a secondary residence at $1 million; 28% have three houses and 14% have four or more houses. Excluding houses to look solely at personal use assets, those with wealth above the $23 million median level have put 33% of their personal use asset expenditures into boats, 37% into collectibles, 6% into cars, and 18% into other items.

Snyder hopes to glean such data to help advisors counsel their clients. If their spending on boats or jets is out of line, the client will know. If their asset allocation is out of whack with others, benchmarks will show that as well. But make no mistake about it, the real value of the database is to sell it to financial product manufacturers and other businesses that want to market their products to the super-wealthy.

“We are an information database company,” says Snyder. “We hope to eventually have a trillion dollars of wealth on our system.” Snyder pledges to keep the data encrypted and never reveal any personal information about the wealthy individuals on PCR Insight, and the contract advisors sign stipulates that.

Once PCR gets about $20 billion of assets on its platform, the plan is to gather data on what types of hedge funds actually are working, and which asset classes the super-wealthy are moving into and out of. That data is extremely valuable. In fact, it means that Snyder can afford to not make much money on collecting data in PCR Insight or scrubbing the data or servicing advisors, since his main revenue stream ultimately will be selling information from the database of super-wealthy households. “It’s not a loss leader, but would not be a worthwhile enterprise standing alone that would compensate our shareholders,” says Snyder. That’s what’s unique about this business model.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (www.advisorproducts.com), which creates client newsletters and Web sites for advisors. Advisor Products may compete or do business with companies mentioned in this column. Gluck can be reached at [email protected].